Glossary

Book Value: The book value of a stock is the dollar value of assets stated on the most recent balance sheet divided by the number of shares outstanding. Book value per share is an “old school,” relative value metric that some investors use as a target for value investing, or other investors use as a measure of a floor value of a stock.

Combined Ratio: The combined ratio is the sum of two ratios, the loss ratio and the expense ratio. The loss ratio is the percentage of each dollar of premium that the insurer loses because it pays out claims. The expense ratio is the the percentage of each dollar that the insurer pays to underwrite new policies.

Price to Earnings Ratio: The Price to Earnings Ratio, or P/E Ratio for short, is a relative measure of value of a stock that is computed by dividing the market price by the earnings per share. Note the denominator, the earnings per share can be a past earnings per share, or a forecast earnings per share estimate, resulting in different earnings per share metrics. The P/E ratio is the among the most prevalent metric used for comparing the relative valuations of stocks.

Relative Value: Relative value is a concept of value that makes different assets comparable. Many times relative value is measured as a ratio, such as a ratio of price to earnings, or price to cash flow.

Value: Value is a concept that is independent of price. Price is an empirical measure, and with stocks is determined by looking at the market price, or the bid & ask. Value is a more esoteric concept that pertains to what the asset is worth or may be worth in the future. It should be obvious that value and price are related concepts. The purpose of seeking to know the value of an assets is either to determine whether to pay the market price, especially relative to expectations of the future market price.

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