Market & Valuation Ratios – Definition & Meaning

Market & valuation ratios are metrics that relate a company’s market price (or enterprise value) to fundamentals like earnings, cash flow, sales, or book value. Investors use them to assess whether a stock appears cheap or expensive versus peers, history, or the broader market.

Key Takeaways

• In one sentence: Market & valuation ratios convert prices into comparable multiples of fundamentals.
• Why it matters: They help identify mispricing, compare peers, and set expectations for returns.
• Common uses: Screening, relative valuation, target-setting, and risk/quality checks.
• Popular examples: P/E, EV/EBITDA, P/B, P/S, dividend yield, PEG.

What Are Market & Valuation Ratios?

These ratios connect price (or enterprise value) to a company metric that reflects scale or profitability. They standardize comparisons across different sizes and capital structures.

• Price-based multiples (e.g., P/E, P/B, P/S) use market price per share versus per-share fundamentals.
• Enterprise-value multiples (e.g., EV/EBITDA, EV/Sales) use enterprise value (EV) to capture debt and cash, making cross-company comparisons more capital-structure neutral.
• Yield-style ratios (e.g., dividend yield, earnings yield) flip the multiple to an implied return rate.

How Market & Valuation Ratios Work

Below are core formulas and how to read them:

P/E (Price-to-Earnings) = Price per Share ÷ Earnings per Share (EPS)

Earnings Yield = EPS ÷ Price per Share

P/B (Price-to-Book) = Price per Share ÷ Book Value per Share

P/S (Price-to-Sales) = Market Cap ÷ Revenue

EV/EBITDA = Enterprise Value ÷ EBITDA

EV/Sales = Enterprise Value ÷ Revenue

Dividend Yield = Annual Dividend per Share ÷ Price per Share

PEG Ratio = (Price ÷ EPS) ÷ EPS Growth Rate

Reading the numbers:

• Lower multiples can indicate undervaluation-but could also reflect weak growth, higher risk, or cyclical headwinds.
• Higher multiples can signal quality and growth expectations-but may leave less margin of safety.
• EV/EBITDA is often used across capital structures and capital-intensive industries; P/B can be more meaningful for banks and insurers; P/S helps when earnings are temporarily depressed.

Example of Ratio Use

Suppose two software firms have similar growth and margins. Company A trades at EV/EBITDA 12×, Company B at EV/EBITDA 8×. If business quality and outlook are alike, the discount in B may suggest value-or point to hidden risks (customer concentration, higher churn). Ratios start the question; they don’t finish it.

Benefits and Considerations

Benefits

• Comparability: Standardizes companies of different sizes and leverage.
• Speed: Quick screen for relative cheap/expensive.
• Decision support: Anchors target prices and scenario analysis.

Considerations

• Accounting noise: EPS and book value depend on accounting choices and one-offs.
• Cyclicality: Mid-cycle vs. trough/peak earnings can distort P/E; EV/EBITDA may be steadier.
• Growth & risk: Multiples must be interpreted with growth, returns on capital, and risk in mind.
• Sector nuance: Use ratios suited to the business model (e.g., P/B for financials, EV/EBITDA for industrials).

Example in Practice

An investor screening global consumer staples sets filters: EV/EBITDA ≤ 12×, Dividend Yield ≥ 3%, Net Debt/EBITDA ≤ 2×. From the shortlist, they compare brand strength, pricing power, and market share before selecting finalists-using ratios as the first pass, fundamentals as the final arbiter.

Related Terms

• Enterprise Value (EV) – total firm value including debt and cash.
• Earnings per Share (EPS) – net income allocated per share.
• Free Cash Flow (FCF) – cash available to owners after investments.
• Return on Invested Capital (ROIC) – profitability relative to capital employed.