The way you find the inverse price ratio depends on which price ratio you're referring to. Generally, finding an inverse simply means calculating 1 divided by the original ratio. Let's look at some examples.
Examples of Inverse Price Ratios
Here are a couple of common examples to illustrate how to find the inverse price ratio:
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Price-to-Earnings (P/E) Ratio and Earnings Yield:
- The P/E ratio compares a company's stock price to its earnings per share (Price/Earnings).
- The inverse of the P/E ratio is the Earnings Yield, which is calculated as Earnings/Price (E/P).
- Formula: Earnings Yield = 1 / P/E Ratio
For example, if a company has a P/E ratio of 20, its earnings yield is 1/20 = 0.05 or 5%. The earnings yield represents the percentage of each dollar invested in the stock that was earned by the company.
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Price-to-Sales (P/S) Ratio and Sales Yield:
- The P/S ratio compares a company's stock price to its revenue per share (Price/Sales).
- The inverse of the P/S ratio could be considered a Sales Yield, which is calculated as Sales/Price. While "Sales Yield" isn't a common term, calculating the inverse can still be useful.
- Formula: Sales Yield = 1 / P/S Ratio
General Formula for Inverse
In general, if you have a price ratio represented as:
Ratio = Price / X
Then, the inverse price ratio is:
Inverse Ratio = X / Price = 1 / (Price / X) = 1 / Ratio
Why Use Inverse Price Ratios?
Inverse price ratios can sometimes provide a different perspective that is easier to interpret. For example:
- Earnings Yield: Expressing a company's value as the return on investment (earnings yield) can be more intuitive than simply knowing the P/E ratio. It helps investors quickly assess the potential return based on earnings.
- Sales Yield: While less common, inverting the P/S ratio could help assess revenue generation relative to the stock price, particularly for companies with negative earnings.
In conclusion, finding the inverse price ratio generally involves dividing 1 by the original price ratio. The interpretation and usefulness of the inverse depend on the specific ratio being used.
