I have received a few comments asking about what I believed to be the most important ratios in valuing a stock. So, today I want to take time and look at a few financial terms that are important to know when investing. Over the next few weeks, I will highlight important terms that investors should know about. This will benefit beginning investors and intermediate investors alike.

Beginners Investing

1. P/E Ratio

The P/E ratio is probably the most important metric to use in valuing a stock. P/E stands for price to earnings. This is known as the earnings multiple. It represents how much an investor is willing to pay for a company’s earnings. For example, if a company has a PE of 20, that means that investors are paying $20 for every $1 of earnings.

2. PEG Ratio

Sometimes the P/E ratio isn’t enough when valuing a stock. The P/E ratio is a useful stat but it can be misleading when judging a company with great growth rates. The PEG ratio is a better measurement because it helps you determine just how you are paying for a company’s earnings growth. For example, a company with a P/E ratio of 40 may seem expensive but it isn’t if the company is growing earnings at a 40% clip. That would be right inline with the P/E.

3. P/B Ratio

The price to book value ratio measures a company’s stock price by its book value. An undervalued stock can often be identified by a lower price to book ratio. An overvalued stock can often be found in stocks with a higher price to book ratio.

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