Evaluate stock's downside risk by using five measures

September 1, 2004

While all financial ratios are important in determining if a stock may be over- or under-valued, combining the ratios can prove very beneficial.

Q.Is there any way to determine the best time to sell a stock if it hasn't performed as well as expected?

There are several possible approaches to calculating a stock's downside potential. The five most common valuation measures for stocks are: price-to-book value, price-to-earnings ratio, price-to-sales ratio, price-to-cash flow ratio, and dividend yield. A general understanding of these measurements should shed some light on share pricing factors.