P/E, EPS, PEG, ROE and more: the stock ratios that actually matter

The building blocks

• Revenue: total sales before costs.
• Net income: profit after all costs, interest and tax.
• EPS (earnings per share): net income divided by shares outstanding.
• Free cash flow: cash left after running and maintaining the business. Profits can be adjusted by accounting choices; cash is harder to fake.

P/E ratio

Price-to-earnings is share price divided by EPS. A P/E of 20 means investors pay $20 for each $1 of yearly profit. A high P/E often means the market expects strong growth; a low P/E may mean low expectations or a business in trouble. There is no universal “good” P/E: compare to the same company’s own history, to competitors and to the market average. Trailing P/E uses past earnings; forward P/E uses estimates, which can be wrong.

PEG ratio

PEG is the P/E divided by expected earnings growth. It tries to adjust P/E for growth: all else equal, a lower PEG suggests you pay less per unit of growth. It relies on growth estimates that are often wrong.

ROE

Return on equity is net income divided by shareholders’ equity. It shows how efficiently a company turns owners’ money into profit. Very high ROE can come from heavy debt, so check it alongside leverage.

Debt-to-equity

Total debt divided by shareholders’ equity. More debt means more risk when business slows, because interest is owed regardless. Acceptable levels vary hugely by industry (banks and utilities carry more).

Book value

Assets minus liabilities, the accounting value of the company. Price-to-book compares market price with it. Useful for asset-heavy businesses; less so for companies whose value is software, brands or people.

Putting it together

• Growth: is revenue rising steadily?
• Quality: do profits turn into cash?
• Safety: can it handle its debt?
• Price: what is the market paying for all that?

Ratios describe the past and the market’s opinion. They cannot tell you what happens next.