P/E, P/B, EV/EBITDA — understanding these metrics separates smart investors from the crowd. Learn how to apply them to Indian stocks.
1. Price-to-Earnings (P/E) Ratio
The most common metric. It tells you how much you are paying for every rupee of earnings. A lower P/E relative to peers might indicate an undervalued stock, but always investigate why it's cheap.
2. Price-to-Book (P/B) Ratio
Crucial for evaluating financial companies (banks, NBFCs) and asset-heavy industries. It compares a firm's market capitalization to its book value.
3. EV/EBITDA
Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is excellent for comparing companies with different debt levels, as it takes debt and cash into account.
4. Return on Equity (ROE)
Measures how effectively management is using shareholders' equity to generate profits. Consistently high ROE (15%+) is a hallmark of strong businesses.
5. Debt-to-Equity Ratio
Indicates financial leverage. In rising interest rate environments, companies with high debt loads can suffer. Look for manageable debt levels.