5.20 Conclusions 

By selectively conducting a price ratio analysis of a business, including comparing price ratios across companies and relative to the industry, you gain important insights into how the market is pricing drivers of value.  This provides you with two types of information.  First, it is the market’s scorecard for evaluating performance along various dimensions of the business strategy and operational efficiency.    Second, it will provide an initial assessment of whether a stock appears to be under or overvalued relative to its competitors and immediate peer group.

In the next chapter, we move from relative valuation using price ratios to the determining the intrinsic value of a stock.  The intrinsic value can be used to decide whether a stock is overpriced or underpriced.  Note that you cannot make such an assessment with price ratios; the market price is an input into calculating the ratios.  So to decide whether a stock is trading at an appropriate price, we need to value the company independently of the stock price.