Price-to-Earnings (P/E) ratio
The divides the price by (EPS). A P/E of 20 means investors pay $20 for every $1 of annual profit. often trade at high P/E ratios (50+) because investors expect earnings to expand significantly. typically carry low P/E ratios (below 15).
P/E tells you how much you're paying for each dollar of earnings.
Earnings Per Share (EPS)
is divided by the number of . A company earning $1 billion with 500 million has EPS of $2. Growing EPS is one of the strongest signals of a healthy business. Analysts track EPS every quarter and compare against .
Price-to-Book (P/B) ratio
The P/B ratio compares to the company's ( minus liabilities). A P/B below 1 suggests the market values the company below its net assets — potentially a bargain, or a sign of problems. Banks and real-estate companies are often valued using P/B.
Price-to-Sales (P/S) ratio
Useful for companies with little or no profit, P/S compares to annual . A P/S of 10 means the market values the company at 10× its annual sales. Software companies often trade at high P/S ratios due to high margins and recurring revenue potential.
Putting it together
No single metric tells the whole story. A low can mean cheap value — or a declining business. A high P/S can reflect growth expectations — or overvaluation. Always compare a company's ratios against its peers in the same industry.
Context is everything: compare ratios within the same industry.