Fundamental Analysis› Valuation Ratios
Valuation Ratios
September 27, 2026
Valuation ratios compare a stock's price to its underlying value — its earnings, book value, sales, or cash flow — helping traders judge whether shares are cheap or expensive.
What Are Valuation Ratios?
A valuation ratio relates a company's stock price to a measure of its underlying value — its profit, assets, sales, or cash flow. Instead of looking at price alone, traders use these ratios to ask: "for every dollar of earnings or assets, how much am I paying?"
No single ratio tells the whole story. A stock can look cheap on P/E but expensive on P/S, or attractive on EV/EBITDA yet rich on P/B. Traders combine several ratios and compare them against sector peers and the company's own history to reach a judgement.
Key Valuation Ratios Traders Use
Each ratio below compares price to a different slice of a company's value, and each comes with a simple illustration of what it measures.
The P/E ratio compares what investors pay for a share with the profit that share earns each year. A low P/E can signal an undervalued stock, while a high P/E suggests the market expects strong future growth.
A $50 stock with $5 EPS has a P/E of 10 ($50 ÷ $5).
The P/B ratio measures a stock's price against the net value of its assets (book value) as recorded on the balance sheet. A P/B under 1 may mean the stock trades for less than its assets are worth.
A $30 stock with $20 book value per share has a P/B of 1.5.
EV/EBITDA values the entire business (including debt) against its core operating cash earnings. Traders use it to compare companies with different debt levels on an apples-to-apples basis.
A company with $1B enterprise value and $200M EBITDA has an EV/EBITDA of 5×.
The P/S ratio compares a company's market value to its sales. It is especially useful for valuing companies that are growing fast but not yet profitable.
A $2B market cap company with $500M revenue has a P/S of 4.
Dividend yield shows the cash income a stock pays each year as a percentage of its price. Income investors use it to find cash-generating stocks, but a very high yield can signal a falling stock price.
A $100 stock paying $4/year has a 4% dividend yield.
The PEG ratio adjusts the P/E for how fast earnings are growing. A PEG below 1 can suggest a stock is cheap relative to its growth, balancing valuation against momentum.
A stock with a P/E of 20 and 20% growth has a PEG of 1.0.
How Traders Use Valuation Ratios
Ratios are comparative tools — they become meaningful only when checked against peers, history, and the health of the business behind the numbers.
Compare a ratio to its historical average or to peers in the same sector to judge whether a stock is undervalued or priced for perfection.
Filter the market for low P/E, low P/B, or low EV/EBITDA names to build a watchlist of potentially undervalued companies.
Use the PEG ratio to reconcile a high P/E with strong growth, so a "expensive" stock may still be attractive if earnings are expanding quickly.
A low ratio alone is not a buy signal — confirm the business is healthy (rising revenue, manageable debt) so the cheapness is real, not a warning.