Valuation ratios compare market value with earnings, book value, sales, cash flow or operating profit. Use the ratio that fits the business model, compare like with like, normalise cyclical earnings and examine growth, risk, accounting quality and capital intensity before drawing a conclusion.
P/E ratio
Useful for profitable equity businesses, but distorted by one-off earnings, cycles, leverage and negative profits.
P/B ratio
Often relevant for banks and asset-heavy businesses when book value is meaningful. Intangible assets and asset quality matter.
P/S ratio
Can compare low-margin or temporarily loss-making businesses, but ignores costs, debt and capital needs.
EV/EBITDA
Compares operating value before depreciation with operating earnings and helps compare different capital structures. It can understate capital expenditure requirements.
PEG ratio
Relates P/E to growth, but depends heavily on uncertain growth estimates and ignores risk and return on capital.
Formulas
| Metric | Simplified formula |
|---|---|
| P/E | Market Price per Share ÷ Earnings per Share |
| P/B | Market Price per Share ÷ Book Value per Share |
| P/S | Market Capitalisation ÷ Revenue |
| EV/EBITDA | Enterprise Value ÷ EBITDA |
| PEG | P/E Ratio ÷ Expected Earnings Growth Rate |
| Dividend yield | Dividend per Share ÷ Market Price per Share × 100 |
Use average balance-sheet values where appropriate and confirm definitions used by the company or data provider.
How to use this in company analysis
- Calculate at least three to five years of history.
- Compare the company with relevant peers using consistent definitions.
- Read notes to accounts and management commentary behind unusual movements.
- Reconcile profit, balance-sheet growth and operating cash flow.
- Do not make a buy or sell decision from one ratio.
Important limitations
- Accounting policies and exceptional items can reduce comparability.
- Sector economics determine what is normal or risky.
- Quarterly values may be seasonal and unaudited.
- Financial companies require sector-specific metrics.
Educational information only. It is not a personalised investment, tax, accounting or buy/sell recommendation. Verify figures from the company’s latest official filings.