Meaningful Minutes

Price-to-earnings ratio A price to earnings multiple or the P/E ratio compares a company’s share price and its earnings. It reflects how much investors are shelling out for each rupee that a company earns and provides a common tool for comparing various stocks. A higher P/E value means that investors are shelling out more for a company’s profit of one rupee as compared to another stock with a low P/E. However, it should not be used to compare companies from different industries. The P/E ratio is calculated by dividing the share price of the company by either the historical or expected earnings per share or EPS --- the company’s net profit divided by the total number of its equity shares. Analysts usually use the P/E ratio on the basis of expected earnings per share. It is called one-year forward multiple.

Return on equity The return on equity is the profit a company earns as a percentage of the total equity. The value of the stock is cheap if it is trading at a low historical price to earnings multiple, but has a high or a rising return on equity. This means that the company is generating profits but the share price is beaten down.

Price-to-book ratio The price-to-book or P/B ratio compares a company’s share price to its book value --- the value of a company per share if assets were liquidated. This metric is also used to identify cheap shares as a P/B ratio indicates how much investors are willing to pay for each rupee of a company’s assets. Moreover, this does not take into account intangible assets of a company like brand or goodwill, thus giving us the company’s real value.

Debt-to-equity ratio Companies raise funds via debt instruments for the production of goods and services. This debt is paid back over long-term periods. However, it is also necessary to access a company’s debt while investing to find out if a company is borrowing more than it should. This is calculated by dividing the total liabilities a company has raised via loans and bonds by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Price/earnings-to-growth ratio The price/earnings-to-growth or PEG ratio is a modified version of the P/E ratio. This is a metric which takes into account a company’s growth in earnings. This helps identify companies that are growing, but have cheaper stock valuations.