Two of the best indicators for the evaluation of companies in the financial services sector is the price-book ratio (P/B) ratio and price-earnings (P/E).
The financial services sector includes stocks of various companies that provide financial services for private and business customers. Three major industries in this sector are banks, investment firms and insurance companies. Investment banks play a key role in the movement of financial markets, as they provide the capital that allows new corporations to start operations and existing corporations to expand. Few financial services firms are expanding operations in emerging economies such as India, Brazil and China.
Although the basic principles of assessment applicable to almost every Type of company, some critical and unique aspects of the financial services sector affect how it is evaluated. Companies in this sector operate under much stricter state regulations than the average for corporations. Also, one of the key indicators in assessing the soundness of the company’s debt, but financial service firms, debt is not always easy to measure or determine what makes a firm’s value and the cost of capital is difficult to assess.
The price of the book ratio
The ratio of p/B, also called the cost of capital, the factor used by traders and investors to compare the carrying value of stock to its market value. P/B ratio is a formula that uses the book value in the last quarter per share to divide the current closing price of the shares. The P/B ratio may be a sign of undervaluation of the shares. This indicator is designed to assess the financial services sector in particular, as the historical analysis showed that the coefficient very accurately track the intrinsic value of financial services firms. (For associated reading, see: how book value and market value differ?)
The P/E ratio shows the relationship of a company’s stock price to its profits, as well as the preferred indicator for assessing financial service firms. High ratio P/E will be interpreted as a signal of higher returns for investors. This ratio is useful in assessing the financial services sector because it indicates the probable future growth of the company. However, investors should be careful when you use it as a ratio P/B And P/E ratio to compare similar companies in the industry, such as small banks and other small banks or one insurance company to another.
Discounted cash flow, although favored by some analysts, is a metric that is not considered to be particularly suitable for the evaluation of companies in the financial services sector. This is because the nature of the financial sector it is often difficult to define exactly what constitute capital expenditure and to accurately measure cash flows. More preferable indicators of an estimation for the ratio of p/B and P/E ratio includes return on equity (roe) and price earnings growth (PEG) ratio. (For associated reading, see: what indicators can be used for the evaluation of companies in the banking sector?)