Fundamentals of Stock Valuation: A Comprehensive Analysis of Five Key Metrics—including P/E and P/B Ratios

3. Layman's explanation: Net assets represent how much the company would be worth if liquidated. A P/B ratio of 1 means you’re paying ¥1 for ¥1 worth of net assets; a ratio below 1 means you’re buying at a discount to net assets. 4. How to use it: ・Below 1: potentially undervalued—commonly termed “trading below book value” ・Between 1 and 3: normal range ・Above 3–5: possibly overvalued—or typical for light-asset companies ・Best suited for capital-intensive industries, such as banking, steel, and real estate Three, Price-to-Sales Ratio (P/S) 1. Definition: The multiple of share price relative to sales per share. It focuses on whether the company can truly generate profits. 2. Formula: P/S = Share price ÷ Sales per share 3. Layman's explanation: Regardless of profitability, this metric first examines how much the company sells. Even unprofitable firms may have turnaround potential—as long as they generate revenue. 4. How to use it: ・The lower the ratio, the lower the market’s valuation per unit of revenue ・Especially suitable for unprofitable but revenue-growing companies—e.g., early-stage e-commerce or tech stocks ・More meaningful when comparing peers within the same industry; cross-industry comparisons are highly unreliable Four, Dividend Yield 1. Definition: The ratio of annual cash dividend per share to the current share price. 2. Formula: Dividend yield = (Dividend per share ÷ Share price) × 100% 3. Layman's explanation: Just as bank deposits earn interest, stocks earn dividends. A higher dividend yield implies richer cash returns. 4. How to use it: ・Above 3% is generally considered solid; above 5% is relatively high ・High dividend yields often signal strong cash flow and management’s willingness to share profits ・Caution: A sharply falling stock price can artificially inflate the dividend yield—be alert to underlying risks Five, PEG Ratio 1. Definition: A metric that combines the P/E ratio with the company’s earnings growth rate. 2. Formula: PEG = P/E ratio ÷ Earnings growth rate (typically using the projected 3–5 year compound annual growth rate) 3. Layman's explanation: It assesses whether the P/E ratio keeps pace with the company’s growth speed. 4. How to use it: ・PEG = 1: valuation is reasonable ・PEG 1: potentially overvalued—or reflects overly optimistic market expectations ・Best suited for growth-oriented companies, such as those in technology or new energy sectors Three Reminders When Using These Metrics 1. No single metric is universally applicable: each has inherent limitations. Banking stocks are best evaluated using P/B; tech growth stocks suit PEG analysis; consumer stocks are commonly assessed via P/E.

How to Select the 'Relative Valuation Method' for Valuation?

Capital-intensive industries typically adopt P/B (Price-to-Book) valuation—for example, steel and real estate firms, where asset scale and quality decisively influence enterprise value. In cyclical industries, the P/B ratio also holds reference value: during industry troughs, corporate earnings face pressure, yet asset values remain relatively stable; thus, a low P/B ratio often signals investment opportunities. Conversely, when the industry overheats and P/B ratios soar, it may indicate market overvaluation of asset worth—warranting caution. P/B valuation is unsuitable for light-asset or emerging-sector enterprises. Their core value stems from intangible assets—such as technology, user base, and brand influence—not fixed assets; hence, net assets cannot fully reflect their true value. P/S (Price-to-Sales) Valuation The Price-to-Sales ratio is a revenue-based valuation metric, calculated as: P/S = Share price ÷ Sales per share. Sales revenue directly reflects operational output, indicating market acceptance and share of the product or service. By comparing share price against sales per share, the P/S ratio provides an alternative dimension for enterprise valuation. Unlike P/E or P/B, it remains unaffected by profitability levels or asset impairments. P/S valuation is commonly applied to startups or growth-stage enterprises—especially unprofitable tech or internet firms. Such companies often incur heavy upfront investments and remain unprofitable in early stages, yet sustain rapid revenue growth—signaling expanding market influence and development potential. P/S enables investors to identify latent value even before profitability materializes. P/S valuation not only compensates for P/E’s inability to cover loss-making firms, but also fills the gap left by P/B’s inapplicability to light-asset businesses. However, note that P/S is primarily useful for intra-industry comparisons; cross-industry P/S ratios lack comparability. Significant differences across industries—in sales models, cost structures, and profit margins—make direct horizontal comparisons prone to misjudgment. PEG Valuation PEG valuation builds upon the P/E ratio by incorporating earnings growth rate—a core variable—yielding the formula: PEG = P/E ratio ÷ Earnings growth rate (expressed as a percentage). For example: a company with a P/E of 30× and an earnings growth rate of 30% yields a PEG of 1. When PEG equals 1, the market’s valuation is deemed reasonable—the P/E ratio aligns closely with the earnings growth rate. PEG valuation addresses P/E’s shortcomings in assessing corporate growth potential and effectively screens for investable companies in industries with stable earnings growth and low leverage. Yet PEG faces clear limitations in highly leveraged and cyclical industries: In highly leveraged sectors—such as real estate—interest expenses significantly distort net income, thereby compromising the accuracy of earnings growth calculations and undermining PEG reliability; In cyclical industries, wide earnings volatility makes earnings growth difficult to forecast precisely—greatly diminishing PEG’s practical utility. EV/EBITDA Relative Valuation