Liquidation value

Liquidation literally means turning a business's assets into readily available cash.

The Liquidation value is the estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business. In a normal growing profitable industry, a company's liquidation value is usually much less than the current share price. In a dying industry, the liquidation value may exceed the current share price. This usually means that the company should go out of business.

There are actually two types of liquidation value, depending on the time available for the liquidation process:

1. Orderly liquidation value. This assumes that the enterprise can afford to sell its assets to the highest bidder. It assumes that the seller can take a reasonable amount of time to sell each asset in its appropriate season and through channels of sale and distribution that fetch the highest price reasonably available.

2. Distress liquidation value. This is an 'emergency' price. This assumes that the enterprise must sell all its assets at or near the same time, to one or more purchasers. For obvious reasons, the Distress Liquidation Value will always be lower than the Orderly Liquidation Value.

Payback Period

The Payback Period (PP) is perhaps the simplest method of looking at one or more investment projects or ideas. The Payback Period method focuses on recovering the cost of investments. PP represents the amount of time that it takes for a capital budgeting project to recover its initial cost.

The Payback Period Calculation is as follows:

The Costs of Project / Investment

PP = ----------------------------------------

Annual Cash Inflows

The PP concept holds that all other things being equal, the better investment is the one with the shorter payback.

Price to Earnings ratio ( P / E ratio)

The Price to Earnings ratio (P/E ratio) is a valuation ratio of a company's current share price compared to its per-share earnings.

The P/E ratio is used for measuring market performance and can be calculated as:

P/E ratio = Market Value Per Share / Earnings Per Share

For example, a company that earned $10M last year, with a million shares outstanding, had earnings per share of $10. If that company's stock currently sells for $100 per share, it has a P/E of 10.