| 1. Price-to-Earnings (P/E) Ratio |
| Formula: P/E Ratio = Market Price per Share / Earnings per Share Purpose: Shows how much investors are willing to pay for $1 of earnings. Use Case: Compare two cable manufacturers. One with P/E = 15, another P/E = 9 → The market sees more growth or reliability in the first. |
| 2. Price-to-Book (P/B) Ratio |
| Formula: P/B Ratio = Market Price per Share / Book Value per Share Purpose: Evaluates whether a stock is over- or undervalued relative to its accounting book value. Tip: Used in asset-heavy industries like manufacturing and utilities. |
| 3. Enterprise Value (EV) |
| Formula: EV = Market Capitalization + Total Debt – Cash and Equivalents Purpose: Reflects the true total value of a business, accounting for both debt and cash. Use Case: Used during mergers or takeovers. Debt-heavy companies may look deceptively cheap by market cap alone. |
| 4. EV / EBITDA Ratio |
| Formula: EV/EBITDA = Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization Purpose: Used to assess profitability and compare across capital structures. Benchmark: Generally, 6–10 is considered normal across sectors. |
| 5. Earnings Per Share (EPS) |
| Formula: EPS = (Net Income – Preferred Dividends) / Average Outstanding Shares Purpose: Measures how much profit is allocated to each share. Tip: Higher EPS often leads to higher stock value, especially in growth companies. |
| 6. Weighted Average Cost of Capital (WACC) |
| Formula: WACC = (E/V) × re + (D/V) × rd × (1 – Tc) Purpose: Represents the firm's overall cost of capital from equity and debt. Use Case: Used as the discount rate in DCF valuations. |
| 7. Discounted Cash Flow (DCF) |
| Formula: DCF = ∑ (Cash Flow / (1 + Discount Rate)ⁿ) Purpose: Estimates today's value of future expected cash flows. Use Case: Used by investors for asset valuation and acquisition decisions. |
| 8. Capital Asset Pricing Model (CAPM) |
| Formula: Expected Return = Risk-Free Rate + β × (Market Return – Risk-Free Rate) Purpose: Used to determine required return given an asset's risk level (beta). Tip: Helps compare investment choices under similar conditions. |
| 9. Dividend Yield |
| Formula: Dividend Yield = Annual Dividend per Share / Market Price per Share Purpose: Shows cash return rate on your investment, excluding capital gains. Investor Tip: Used for stable, income-generating investments. |
| 10. Return on Equity (ROE) |
| Formula: ROE = Net Income / Shareholder's Equity Purpose: Indicates how efficiently a company uses equity to create profits. Tip: Higher ROE = higher efficiency, but check if it's boosted by leverage. |