"Is this stock cheap or expensive right now?" It's the first question that comes to mind when picking a stock. The share price itself (say, $50 vs $500) is no basis for comparison. Instead we use valuation metrics that show where the price sits relative to a company's earnings, assets, and dividends. Here are the four most fundamental ones.
P/E (price-to-earnings ratio)
P/E = share price ÷ earnings per share (EPS). It shows how many times a company's annual earnings the stock trades at. A P/E of 15 can be read intuitively as "about 15 years to recover your money if current earnings hold steady."
- A high P/E: the market expects strong future growth — or the price is expensive relative to earnings.
- A low P/E: it could be undervalued, but often it's a "cheap for a reason" case reflecting stalled growth or risk.
The P/E is most meaningful within the same sector. Directly comparing the P/E of a high-growth tech stock with a mature bank is not appropriate.
P/B (price-to-book ratio)
P/B = share price ÷ book value per share. It's the price relative to the company's net assets (equity). A P/B of 1 means the market cap equals book equity.
- P/B < 1: trading below book value — traditionally read as a value signal, but the assets may be low-quality or profitability weak.
- A high P/B company usually has a high return on equity (ROE), using its assets efficiently. So the P/B should be paired with ROE.
It is especially useful in asset-heavy sectors like banks, insurers, and manufacturers, and less informative for asset-light software and services firms.
PEG (P/E relative to growth)
The P/E's weakness is that it ignores growth. PEG = P/E ÷ annual earnings growth rate (%) corrects for this. A PEG around 1 is often seen as fair, and below 1 as cheap relative to growth. A fast grower can be reasonable on a PEG basis even with a high P/E. It relies heavily on the growth estimate, though, so the metric wobbles when the estimate is off.
Dividend yield
Dividend yield = annual dividend per share ÷ share price. It's how much you get back in dividends relative to the price. More mature, stable companies tend to yield more. But an unusually high yield can be a warning. It may be that the price has crashed, sending the yield soaring, and a dividend the earnings can't support (an excessive payout ratio) risks being cut.
How to combine them
- Don't trust a single metric. You need P/E, P/B, growth, and debt together to form a picture.
- Compare with peers and past averages. Relative position matters more than the absolute number.
- Check "cheap for a reason." Distinguish whether a low P/E or P/B is undervaluation or structural weakness.
Indicators worth watching alongside
Valuation reads more richly alongside interest rates (the discount rate), the earnings trend, and the sector cycle. When rates rise, the same P/E becomes more of a burden.
In the "Explore stocks" section of the Global Market Dashboard's stocks tab, you can see each stock's P/E, EPS, market cap, dividend, and financial trends together. Compare them for yourself.
This article is for informational purposes only and is not investment advice.