Financial Ratio Calculators
P/E Ratio
P/B Ratio
EPS
Understanding These Key Financial Ratios
What is the Price-to-Earnings (P/E) Ratio?
The P/E ratio is one of the most widely used metrics for valuing a company. It measures its current share price relative to its per-share earnings. In essence, the P/E ratio tells you how much investors are willing to pay today for $1 of the company’s past or future earnings.
A high P/E ratio could mean that a stock’s price is high relative to its earnings and is possibly overvalued. Conversely, a low P/E ratio might indicate that the current stock price is low relative to its earnings, potentially signaling it’s undervalued. It’s most useful when compared against a company’s historical P/E or against competitors in the same industry.
What is the Price-to-Book (P/B) Ratio?
The P/B ratio compares a company’s current market price to its book value. A company’s “book value” is its total assets minus its total liabilities, essentially the net worth of the company if it were to be liquidated. The P/B ratio helps investors find undervalued stocks by showing how much they are paying for the company’s net assets.
A P/B ratio under 1.0 is often considered a sign of an undervalued stock, as it suggests the market price is less than the company’s stated book value. A higher P/B ratio might imply the stock is overvalued. This ratio is particularly useful for valuing companies with significant tangible assets, like banks or manufacturing firms.
What is Earnings Per Share (EPS)?
Earnings Per Share (EPS) is a fundamental measure of a company’s profitability. It calculates the portion of a company’s profit that is allocated to each outstanding share of common stock. It is a critical component used in calculating the P/E ratio.
A higher EPS indicates greater profitability and value for shareholders. A growing EPS over time is a strong sign that the company is increasing its profitability and creating more value. Investors often look for companies with a consistent history of growing their EPS.
(This calculator simplifies by using Net Income, assuming no preferred dividends)