Module 5 of 8 in Fundamental analysis
Valuation ratios
P/E, P/B, PEG, enterprise value, EV/EBITDA and yield measures, how to compare them with history and peers, and when they mislead.
9 lessons in this module. Progress is saved in your browser as you go.
Valuation ratios compare what the market charges for a business with what the business produces. They are quick and useful, and also easy to misuse. This module explains each ratio, when it fits a company and when it does not, and why a low ratio is not the same as a bargain.
By the end of this module you should be able to
- Calculate and interpret P/E, PEG and earnings yield.
- Calculate P/B, enterprise value and EV/EBITDA and explain when each is appropriate.
- Compare valuations with a company's history and its peers while accounting for growth, risk and cycles.
- Identify situations where valuation ratios mislead, such as cyclical peaks, losses and one-off profits.
Lessons in order
Module test
10 questions, chosen at random from a bank of 33 questions and balanced across this module's learning goals and difficulty levels. Every question comes with an explanation. You need 80% to pass, and you can retake it as often as you like with a fresh set of questions.
This module builds on
- Earnings per share: P/E divides the share price by earnings per share, explained there.
- Market capitalisation: P/E can also be calculated as market capitalisation divided by net profit.
- The balance sheet: Book value is shareholders' equity from the balance sheet.
- Revenue and earnings growth: PEG divides by a growth rate, and that lesson explains how to measure growth properly.
- Debt-to-equity and net debt: Enterprise value adds net debt, measured as explained there.
- Operating profit, EBITDA and net profit: EBITDA and EBIT are explained there.
- Free cash flow and cash conversion: Free cash flow yield uses free cash flow, explained there.
- Dividend payout and coverage: Dividend yield and its sustainability are covered there.
- Return on capital employed (ROCE): Returns on capital are one of the main drivers of sector multiples.
- Cyclical and capital-intensive businesses: Cyclical peaks and troughs are one of the main ways ratios mislead.
- Quality of earnings: One-off and low-quality profits distort the ratios built on them.
Key terms in this module
- P/E ratio
- Earnings yield
- Earnings per share
- Market capitalisation
- Price-to-book ratio
- Book value
- Return on equity
- Shareholders' equity
- PEG ratio
- CAGR
- Enterprise value
- Net debt
- Non-controlling interest
- EV/EBITDA
- EBITDA
- Capital expenditure
- Dividend yield
- Free cash flow yield
- Free cash flow
- Peer group
- Mean and median
- Return on capital employed
- Cyclical business
- Value trap
- Exceptional items