Common Valuation Ratios

Let's look at the ways in which a stock's price compared with the value of the underlying company can be represented.

Valuations are usually expressed as the ratio of a company's share price to an aspect of its financial performance, such as:

• price/earnings (P/E), 
• price/sales (P/S), 
• price/book value (P/B),
• price/cash flow (P/CF), or 
• price/estimated growth rate (P/EG)

We know that a stock's value is a combination of the company's present condition and its future prospects, and it is usually measured by a series of ratios.

But how do we decide if that value is too high, too low, or just right?

This is where things can get tricky, because valuing stocks is sometimes more an art than a science.  

That's why it is not uncommon for two analysts to look at the same company and come up with different conclusions.