5 Best Stock Valuation Metrics Every Investor Should Know

Successful stock investing requires understanding how to value companies. While there are dozens of metrics available, mastering these five fundamental ratios will give you a solid foundation for making informed investment decisions.

1. Price-to-Earnings (P/E) Ratio

What It Measures

The P/E ratio shows how much investors are willing to pay for each dollar of earnings.

Formula

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

Example

• Stock price: $100
• EPS: $5
• P/E = 100 / 5 = 20

Interpretation

• Low P/E (< 15): May be undervalued or facing challenges
• Medium P/E (15-25): Fairly valued in most markets
• High P/E (> 25): Growth expectations or potential overvaluation

When to Use

• Quick valuation comparison between companies
• Screening for value stocks
• Comparing to industry averages
• Historical valuation analysis

Limitations

• Doesn't account for growth
• Can be manipulated by accounting
• Useless for unprofitable companies
• Varies widely by industry

2. PEG Ratio (Price/Earnings-to-Growth)

What It Measures

PEG ratio adjusts the P/E ratio for growth, showing if you're paying a fair price for growth.

Formula

PEG Ratio = P/E Ratio / Annual Earnings Growth Rate

Example

• P/E: 30
• Growth rate: 25%
• PEG = 30 / 25 = 1.20

Interpretation

• PEG < 1.0: Potentially undervalued
• PEG = 1.0: Fairly valued
• PEG > 2.0: Potentially overvalued

When to Use

• Evaluating growth stocks
• Comparing companies with different growth rates
• Identifying undervalued growth opportunities

Limitations

• Depends on accurate growth estimates
• Ignores dividend yield
• Not suitable for negative or zero growth

Learn more about PEG ratio →

3. PEGY Ratio

What It Measures

Enhanced PEG that includes dividend yield for total return assessment.

Formula

PEGY = P/E / (Growth Rate + Dividend Yield)

Example

• P/E: 20
• Growth: 8%
• Dividend yield: 4%
• PEGY = 20 / (8 + 4) = 1.67

Interpretation

Same as PEG, but more accurate for dividend stocks.

When to Use

• Analyzing dividend-paying stocks
• Comparing growth vs income stocks
• Building balanced portfolios
• Evaluating total return potential

Deep dive into PEGY ratio →

4. Price-to-Book (P/B) Ratio

What It Measures

Compares market value to book value (net assets).

Formula

P/B Ratio = Stock Price / Book Value Per Share

Example

• Stock price: $50
• Book value per share: $25
• P/B = 50 / 25 = 2.0

Interpretation

• P/B < 1.0: Trading below asset value (potential value)
• P/B = 1.0 to 3.0: Fairly valued
• P/B > 3.0: Premium valuation or asset-light business

When to Use

• Evaluating financial institutions (banks, insurance)
• Analyzing asset-heavy industries (manufacturing, real estate)
• Value investing screens
• Bankruptcy or liquidation scenarios

Limitations

• Less relevant for service/tech companies
• Book value can be outdated
• Intangible assets often undervalued
• Varies dramatically by industry

5. Debt-to-Equity Ratio

What It Measures

Shows how much debt a company uses relative to shareholder equity.

Formula

Debt-to-Equity = Total Debt / Total Shareholders' Equity

Example

• Total debt: $500 million
• Shareholders' equity: $1 billion
• D/E = 500 / 1,000 = 0.5

Interpretation

• D/E < 0.5: Conservative, low leverage
• D/E = 0.5 to 1.0: Moderate leverage
• D/E > 1.0: High leverage, higher risk
• D/E > 2.0: Very high risk except in certain industries

When to Use

• Assessing financial stability
• Comparing leverage across companies
• Evaluating recession resistance
• Risk assessment

Limitations

• Varies enormously by industry
• Debt isn't always bad (cheap financing)
• Doesn't show debt quality or maturity
• Off-balance-sheet obligations not included

Putting It All Together

Example: Complete Stock Analysis

Let's analyze two stocks using all five metrics:

Analysis:

• Tech Growth: High P/E justified by growth (good PEG). Asset-light business (high P/B normal). Low debt.
• Stable Dividend: Moderate P/E looks cheap but PEG shows slow growth. PEGY reveals dividend makes it more attractive. Higher but acceptable debt.

Quick Reference Guide

For Growth Stocks

1. PEG Ratio (primary)
2. P/E Ratio
3. Debt-to-Equity
4. Revenue growth trends

For Dividend Stocks

1. PEGY Ratio (primary)
2. Dividend yield & growth
3. Payout ratio
4. Debt-to-Equity

For Value Stocks

1. P/E Ratio (primary)
2. P/B Ratio
3. Debt-to-Equity
4. Enterprise Value/EBITDA

For Financial Stocks

1. P/B Ratio (primary)
2. P/E Ratio
3. Return on Equity (ROE)
4. Tier 1 Capital Ratio

Common Mistakes to Avoid

1. Using Single Metrics

Never rely on just one ratio. Use multiple metrics for confirmation.

2. Ignoring Industry Context

Compare companies within the same industry. A tech P/E of 30 is very different from a utility P/E of 30.

3. Forgetting Growth

A low P/E isn't attractive if earnings are declining.

4. Overlooking Quality

Low valuations often reflect poor business quality or structural challenges.

5. Chasing Low Ratios

The cheapest stock isn't always the best investment. Sometimes cheap is cheap for good reason.

Tools to Simplify Your Analysis

StockPEG Platform

Our free tools calculate all these metrics automatically:

• Instant calculations for any stock
• Compare multiple stocks side-by-side
• Historical charts showing 10-year trends
• Global coverage across 65+ markets
• Stock screener to filter by any metric

Start analyzing stocks now →

Next Steps to Master Stock Valuation

1. Practice with real stocks - Use our calculator on 5-10 companies
2. Compare within industries - Analyze all stocks in one sector
3. Track your winners - See which metrics predicted success
4. Learn advanced metrics - ROE, ROIC, Free Cash Flow Yield
5. Build a watchlist - Monitor valuation changes over time

Resources for Continued Learning

• PEG Ratio Complete Guide
• PEGY Ratio Explained
• Free Stock Calculator
• Stock Screener Tool
• Valuation Metrics Guide

Key Takeaways

✅ P/E Ratio - Basic valuation, compare to peers
✅ PEG Ratio - Best for growth stocks
✅ PEGY Ratio - Best for dividend stocks
✅ P/B Ratio - Good for asset-heavy companies
✅ Debt-to-Equity - Assess financial risk

Use multiple metrics together for robust analysis. No single metric tells the complete story.

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Disclaimer: Educational content only, not financial advice. All investing involves risk. Consult a financial advisor for personalized guidance.