Valuation Metrics Explained

Master the key metrics used to evaluate companies and make informed investment decisions. From P/E ratios to ROE, learn what each metric means and when to use it.

Valuation Multiples

Price-to-Earnings (P/E) Ratio

P/E Ratio

The P/E ratio measures how much investors are willing to pay for each dollar of a company's earnings.

FORMULA

P/E Ratio = Stock Price / Earnings Per Share (EPS)

Price/Earnings to Growth (PEG) Ratio

PEG Ratio

The PEG ratio adjusts the P/E ratio for a company's expected earnings growth rate, providing a more complete valuation picture.

FORMULA

PEG Ratio = (P/E Ratio) / Earnings Growth Rate

Price-to-Book (P/B) Ratio

P/B Ratio

The P/B ratio compares a company's market value to its book value, measuring how much investors pay for each dollar of net assets.

FORMULA

P/B Ratio = Market Cap / Book Value of Equity

Price-to-Sales (P/S) Ratio

P/S Ratio

The P/S ratio measures how much investors pay for each dollar of a company's revenue, useful for valuing unprofitable companies.

FORMULA

P/S Ratio = Market Cap / Annual Revenue

Enterprise Value Multiples

EV/EBITDA Ratio

EV/EBITDA

EV/EBITDA compares enterprise value to earnings before interest, taxes, depreciation, and amortization, providing a debt-inclusive valuation metric.

FORMULA

EV/EBITDA = Enterprise Value / EBITDA

EV/EBIT Ratio

EV/EBIT

EV/EBIT compares enterprise value to earnings before interest and taxes, providing insight into operational profitability.

FORMULA

EV/EBIT = Enterprise Value / EBIT

EV/Sales Ratio

EV/Sales

EV/Sales compares enterprise value to revenue, providing a comprehensive revenue-based valuation that accounts for debt.

FORMULA

EV/Sales = Enterprise Value / Annual Revenue

Profitability Metrics

Return on Equity (ROE)

ROE

ROE measures how efficiently a company generates profits from shareholders' equity, indicating management effectiveness.

FORMULA

ROE = Net Income / Shareholders' Equity × 100%

Net Profit Margin

Net Margin

Net margin measures what percentage of revenue remains as profit after all expenses, taxes, and costs are deducted.

FORMULA

Net Margin = (Net Income / Revenue) × 100%

Operating Profit Margin

Operating Margin

Operating margin measures what percentage of revenue remains after paying operating expenses, before interest and taxes.

FORMULA

Operating Margin = (Operating Income / Revenue) × 100%

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