Imagine two food trucks for sale. Both make 50,000 dollars a year in profit. The first is priced at 100,000 dollars, the second at 500,000. Which is the better deal? You cannot answer with the price alone, or the profit alone. You have to put them together: how much am I paying for each dollar of profit? That single question is the heart of valuation, and the ratios below are just neat ways of asking it about stocks.
The price-to-earnings ratio
The most famous valuation ratio is the price-to-earnings ratio, written P/E. It takes the share price and divides it by the earnings per share. If a stock trades at 40 dollars and earned 2 dollars per share last year, its P/E is 20. In plain words, you are paying 20 dollars for every one dollar of yearly profit the company produces.
A low P/E can mean a stock is cheap relative to its profits, or that investors expect its profits to shrink. A high P/E can mean a stock is expensive, or that investors expect its profits to grow quickly and are paying up for that future. The P/E does not tell you which. It only tells you the price tag on today's earnings, and the reason behind it is for you to investigate.
The price-to-sales ratio
Some companies, especially young or fast-growing ones, do not have earnings yet. They are pouring everything back into growth. For them, P/E is useless, because there is no profit to divide by. The price-to-sales ratio, or P/S, steps in by comparing the company's total value to its revenue instead of its earnings. It answers: how much am I paying for each dollar of sales? It is a rougher measure than P/E, since sales are not profit, but it lets you value a company that is not yet profitable.
The price-to-book ratio
The price-to-book ratio, or P/B, compares the company's market value to its book value, which is roughly what the company would be worth on paper if it sold everything it owns and paid off everything it owes. A P/B near one means the stock is priced close to the value of its physical stuff. A high P/B means investors value the company far above its tangible assets, usually because of its brand, its people, or its future prospects. P/B is most useful for businesses heavy in physical assets, like banks and manufacturers, and less telling for companies whose value is mostly ideas.
The PEG ratio: valuation with growth baked in
The P/E ratio has a blind spot: it ignores growth. A company with a P/E of 30 might be a bargain if its profits are growing fast, and a trap if they are flat. The PEG ratio fixes this by dividing the P/E by the company's earnings growth rate. As a rough guide, a PEG around one suggests the price and the growth are roughly in balance. Below one may hint at good value for the growth on offer, and well above one may mean you are paying a lot for that growth. It is a blunt tool, but it drags growth into the picture where P/E alone leaves it out.
Dividend yield: cash in hand
Some companies hand a slice of their profit directly to shareholders as a dividend. The dividend yield expresses that payment as a percentage of the share price. If a stock trades at 100 dollars and pays 3 dollars a year in dividends, the yield is three percent. It tells income-focused investors how much cash they get back each year just for holding the stock. A very high yield can be attractive, but it can also be a warning sign that the price has fallen sharply or the payment may not be sustainable.
Using them together
No single ratio settles anything. Think of them as a set of instruments on a dashboard. P/E frames the price against profit, P/S covers companies without profit yet, P/B grounds you in tangible worth, PEG folds in growth, and dividend yield measures the cash you get back. Read together and compared fairly, they turn the vague question of is this stock expensive into something you can actually reason about.