The Treasure Hunt: A Tale of Valuation Ratios


In the kingdom of Investia, merchants, traders, and nobles constantly sought the most valuable treasures—companies that would bring them great fortune. However, identifying a true gem from an overhyped stone wasn’t easy.

One day, a young investor named Leo the Analyst set out on a quest to find the most valuable company in the land. He met Sir Valuaton, the wise old scholar of Investia, who handed him a magical map—the Valuation Ratios—which would help him separate true wealth from illusion.

Step 1: The Price-to-Earnings (P/E) Ratio – The Profit Compass

Sir Valuaton pointed at the first tool on the map:
👉 P/E Ratio = Price per Share / Earnings per Share

“This,” he said, “tells you how much gold (price) you must pay for each piece of treasure (earnings). A high P/E means investors expect the company to grow fast, but beware—sometimes, overpriced companies are just illusions!”

Leo used this ratio to compare two companies:

  • Company A: P/E = 30
  • Company B: P/E = 10

Company A was more expensive relative to its earnings. “Is it worth the price?” Leo wondered.

Step 2: The Price-to-Book (P/B) Ratio – The Asset Gauge

Sir Valuaton then showed him another tool:
👉 P/B Ratio = Price per Share / Book Value per Share

“This tells you how much you are paying for the company’s actual assets. If the P/B is too high, the company may be overvalued.”

Leo checked:

  • Company A: P/B = 6
  • Company B: P/B = 1.5

Company A’s assets were selling at 6 times their worth! “That seems risky,” Leo thought.

Step 3: The Price-to-Sales (P/S) Ratio – The Revenue Map

Next, Sir Valuaton revealed another secret:
👉 P/S Ratio = Market Capitalization / Total Revenue

“This tells you how much investors are paying for each gold coin (revenue) the company earns.”

Leo found that:

  • Company A: P/S = 10
  • Company B: P/S = 2

Company A’s sales were valued much higher than Company B’s. Was it justified?

Step 4: The Dividend Yield – The Gold Stream

Finally, Sir Valuaton introduced the Dividend Yield—a sign of steady treasure flow.
👉 Dividend Yield = (Annual Dividend per Share / Price per Share) × 100

“This tells you how much return you’ll get just from owning the stock.”

Leo checked:

  • Company A: 0.5% (low dividend)
  • Company B: 4% (good dividend)

Company B provided a steady stream of gold, while Company A reinvested its profits for growth.

The Final Decision

After analyzing all the valuation ratios, Leo realized that Company A was expensive and risky, while Company B was more fairly priced and stable.

“Not all that glitters is gold,” he whispered, as he wisely invested in Company B.

And thus, armed with the power of Valuation Ratios, Leo became one of the wealthiest investors in Investia.

[Finance]

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