Market value ratios are the formulas that compare a company’s stock price to a specific piece of its financial performance, so you can judge whether shares look cheap, expensive, or fairly priced relative to what the business actually produces. The six most commonly used are the price-to-earnings ratio, the price-to-sales ratio, the price-to-book ratio, dividend yield, enterprise value to EBITDA, and the PEG ratio. Each one answers a slightly different question, and each one has situations where it works well and situations where it misleads. The raw ingredients for all of them come from the same public filings companies submit to the Securities and Exchange Commission.
Price-to-Earnings Ratio
The price-to-earnings ratio (P/E) is the most widely quoted of the group. Divide the current share price by earnings per share (EPS), and the result tells you how many dollars the market is charging for every dollar of annual profit. EPS itself is net income minus any preferred dividends, divided by the weighted average number of common shares outstanding.
A P/E of 20 means the stock trades at twenty times earnings. That number alone tells you very little. It becomes useful when you compare it against the company’s own history, its industry peers, or a broad benchmark. A P/E well above the industry median can signal strong expected growth or an overpriced stock. A P/E well below peers can point to a bargain or a business in decline. Context does the work.
Trailing P/E Versus Forward P/E
Two versions of this ratio circulate in financial media. Trailing P/E uses the last twelve months of actual, reported earnings. Forward P/E uses analyst forecasts for the coming twelve months. Because analyst projections lean optimistic, forward P/E ratios usually look lower than trailing P/E ratios for the same stock. A stock that looks cheap on a forward basis can end up expensive once actual earnings arrive. Check which version any source is using before you draw a conclusion.
GAAP Versus Adjusted Earnings
Companies report earnings two ways. GAAP earnings follow standard accounting rules. Adjusted or non-GAAP earnings strip out items management considers one-time or non-recurring, such as stock-based compensation, restructuring charges, and acquisition costs. Adjusted earnings almost always come in higher than GAAP, which pushes the P/E ratio down and makes the stock look cheaper. Neither figure is inherently wrong, but a P/E built on adjusted earnings won’t match one built on GAAP. Financial data providers often default to adjusted, so the P/E on a screener may not match what you’d calculate straight from the income statement.
Price-to-Sales Ratio
The price-to-sales ratio (P/S) moves the focus from profit to revenue. Divide market capitalization by trailing twelve-month revenue, or divide share price by revenue per share. Both approaches give the same result.
This ratio earns its keep when evaluating companies that aren’t yet profitable. Young tech firms, biotech companies burning cash on research, and startups reinvesting every dollar into growth all report negative earnings, which makes P/E useless. Revenue is also harder to shape through accounting choices than net income, so P/S gives a cleaner look at the scale of the business.
Sector benchmarks vary enormously. As of January 2026, system and application software companies traded at a median P/S above 11, semiconductors around 15.5, general retail near 2.0, and grocery retailers below 0.35.1NYU Stern. Price to Sales Ratios – Revenue Multiples by Sector (US) Comparing a software company’s P/S to a grocery chain’s is meaningless. The ratio works only within industries where business models and margins are roughly similar.
Price-to-Book Ratio
The price-to-book ratio (P/B) measures what the market is willing to pay relative to the company’s net asset value on the balance sheet. Book value equals total assets minus total liabilities and intangible assets such as goodwill and patents.2LII / Legal Information Institute. Book Value Divide share price by book value per share to get the ratio.
A P/B of 1.0 means the stock trades at the accounting value of its net physical assets. Below 1.0, the market is pricing the company at less than what those assets would theoretically fetch in liquidation. Banks, insurers, and heavy manufacturers tend to sit near 1 because their value is closely tied to tangible balance sheet items, which makes P/B one of the more useful ratios for financial institutions.
Where P/B Breaks Down
The ratio runs into trouble with businesses whose value lives in intellectual property, brand recognition, or network effects. As of January 2026, computer and peripheral companies traded at a P/B above 34, and software firms above 9, while basic chemical producers sat around 1.12 and steel companies near 1.88.3NYU Stern. Price to Book Ratios That gap doesn’t mean software is wildly overpriced. It means the most valuable assets of those companies never appear on the balance sheet under standard accounting rules. Some companies also report negative book value, often from large buyback programs or accumulated losses rather than actual distress. When book value goes negative, P/B stops meaning anything.
Dividend Yield
Dividend yield measures the annual cash payout you receive as a percentage of the share price. Divide total annual dividends per share by the current price. A stock trading at $50 that pays $2 in annual dividends yields 4%.
This ratio lets you compare the cash return on a stock directly against other income investments such as bonds or savings accounts. It reflects the board’s decision about how much profit to distribute versus reinvest. High-growth companies often pay nothing, while mature companies in stable industries like utilities and consumer staples tend to pay more.
An unusually high yield isn’t always good news. Because yield equals dividends divided by price, a falling stock price automatically pushes the yield up. A company whose shares dropped 40% will suddenly show a much higher yield even though the payout hasn’t changed. Sometimes the elevated yield signals that the market expects a cut. If a company pays out more than it earns, the math eventually catches up and the dividend gets reduced or eliminated. A yield far above industry peers deserves skepticism, not celebration.
Enterprise Value to EBITDA
EV/EBITDA takes a wider view than the ratios above. Instead of looking at equity alone, enterprise value accounts for the entire capital structure. Start with market capitalization, add total debt, and subtract cash and cash equivalents. The result represents the theoretical cost of buying the whole business and settling its obligations.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It approximates the cash generated from operations before financing costs and non-cash accounting charges. Divide enterprise value by EBITDA and you get a multiple that reflects what a buyer would pay relative to operating cash flow.
This is a standard tool in mergers and acquisitions because it strips out variables that differ from one company to the next: tax jurisdictions, financing decisions, and depreciation methods. A software company with no debt and a manufacturer carrying heavy debt can look similar on a P/E basis but very different on EV/EBITDA, because the latter captures the debt burden. Manufacturing companies often trade at EV/EBITDA multiples in the range of 5 to 8, while high-growth software businesses can command 15 or higher. As with every ratio here, the number means little without an industry-specific benchmark.
PEG Ratio
The P/E ratio’s biggest blind spot is growth. A company growing earnings at 30% per year deserves a higher P/E than one growing at 5%, but P/E alone doesn’t account for that. The PEG ratio fills the gap by dividing the P/E by the expected annual earnings growth rate.4NYU Stern. PEG Ratio
A PEG below 1.0 suggests the stock may be underpriced relative to its growth prospects. Above 1.0 suggests the opposite. Peter Lynch popularized the idea that a fairly valued company should have a P/E roughly equal to its earnings growth rate, which translates to a PEG of 1.0. These are guidelines, not rules. The result depends entirely on the growth estimate plugged in, and analyst forecasts lean optimistic. For companies with extremely high or volatile growth rates, small changes in the estimate swing the ratio dramatically, so PEG becomes unreliable at the extremes.
Limits Worth Knowing Before You Act
Every ratio here has the same fundamental weakness: it reduces a complex business to a single number. Experienced investors treat these metrics as starting points for research, not as buy or sell signals.
Accounting Quality
Market value ratios are only as reliable as the financial statements they’re built on. Companies exercise discretion over how they recognize revenue, classify expenses, and account for intangible assets. Research from Stanford’s Graduate School of Business found that bankruptcy prediction models correctly classified 91% of bankrupt firms in years without financial restatements, but only 68% of bankrupt firms that had restated their earnings.5Stanford Graduate School of Business. Beware: Corporate Financial Statements Decline in Predictive Value A company shaping its reported results can make every ratio look healthy right up until it collapses. Heavy spending on research and development, which doesn’t appear as a balance sheet asset under current accounting rules, further distorts ratios like P/B for technology and pharmaceutical companies.
Value Traps
A stock with a low P/E, low P/B, and high dividend yield looks like a bargain on paper. Sometimes it is. Other times, it’s cheap for a reason. Research Affiliates defines value traps as cheap companies whose problems haven’t been fully reflected in prices yet, often due to mismanagement, weak balance sheets, or a deteriorating competitive position.6Research Affiliates. Active Value Investing: Avoiding Value Traps The stock keeps looking cheap as the business erodes. Screening for quality indicators alongside valuation is where most of the hard work happens.
Cross-Industry Comparisons
Comparing a software company’s P/S of 11 to a grocery chain’s P/S of 0.34 tells you nothing about which is the better deal. It tells you that software firms operate on high margins with scalable products, and grocery stores run on thin margins with high revenue volume. Every ratio in this article produces useful signals only when applied within industries where the underlying business economics are roughly comparable, and even then, differences in company size, growth stage, and geographic exposure can make direct comparisons misleading without additional context.
Where to Find the Raw Data
You don’t need a Bloomberg terminal to calculate these ratios. The SEC’s EDGAR system provides free access to every public filing. The full-text search lets you look up any publicly traded company by name, ticker, or CIK number and filter by filing type.7SEC.gov. EDGAR Full Text Search The two filings you’ll use most are the 10-K annual report and the 10-Q quarterly report.
Inside a 10-K, the cover page lists shares outstanding for market capitalization. The income statement provides revenue, net income, and earnings per share. The balance sheet gives total assets, total liabilities, and intangibles for book value. The cash flow statement helps you back into EBITDA. Dividend information typically appears in Part II, Item 5.8SEC.gov. Form 10-K Annual Report For the current share price you’ll need a live market data source, since SEC filings only capture prices as of specific dates.
Once you’ve pulled the numbers yourself, cross-check them against pre-calculated ratios on financial data sites. Discrepancies usually come down to which earnings figure the provider used (GAAP versus adjusted, trailing versus forward) or how they handled share dilution. Doing the math at least once per company teaches you more about the business than any screener will.