Valuation ratios
How does the market price a company's shares relative to its earnings, book value and EBITDA? Valuation ratios combine market prices with accounting figures.
- Earnings per share EPSMeasure
(Net income − Preferred dividends) ÷ Weighted average common shares - Price-to-earnings ratio P/E, PERRatio
Share price ÷ Earnings per share (EPS) - Price-to-book ratio P/BRatio
Share price ÷ Book value per share - EV/EBITDARatio
Enterprise value ÷ EBITDA
Reading valuation ratios together
Valuation ratios relate the price investors pay for a company to what its accounts show. The price-to-earnings ratio compares the share price with earnings per share, price-to-book compares it with book value per share, and EV/EBITDA compares the value of the whole business, including its debt and net of its cash, with EBITDA.
These ratios need a market price, so they apply to listed companies or to a price you are considering paying. A low multiple can mean a business is cheap or that investors expect its earnings to fall, so compare multiples with the company’s own history and with similar companies, and check which earnings figure each source uses.