Valuation ratios are key financial metrics used by investors and analysts to determine whether a company’s stock is fairly priced, overvalued, or undervalued. These ratios compare a company’s market value to its fundamentals, such as earnings, book value, or sales. Understanding valuation ratios helps investors make informed decisions based on data rather than speculation.

The most commonly used valuation ratios include the Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, and Price-to-Sales (P/S) ratio. The P/E ratio measures how much investors are willing to pay for each rupee of earnings, providing insight into market expectations and growth potential. A high P/E may indicate optimism about future earnings, while a low P/E could signal undervaluation or slower growth prospects. Similarly, the P/B ratio compares the market price to the company’s book value, reflecting how the market perceives the firm’s net assets.

Another important measure is the Enterprise Value-to-EBITDA (EV/EBITDA) ratio, which evaluates a company’s overall valuation, including debt, relative to its operating earnings. This ratio is particularly useful for comparing firms across industries with different capital structures. Meanwhile, the Dividend Yield helps investors assess the return from dividends relative to the stock’s price, often favored by income-focused investors.

It’s essential to interpret valuation ratios in context. Industry standards, market conditions, and company growth potential all influence what constitutes a “good” ratio. No single ratio gives a complete picture; investors often analyze multiple metrics together for a balanced view. By understanding and applying valuation ratios effectively, investors can make better, research-driven investment decisions aligned with their financial goals and risk tolerance.