Income statement
Revenue, costs, and profit over a period. Source for EPS, revenue, COGS, and net income.
Lesson 01 · Markets
Stock valuation metrics.
Eight ratios that turn a company’s financial statements into comparable numbers. None of them decide anything on their own—together they describe what a business earns, what it owns, what it owes, and what investors are currently willing to pay for it.
Back to all topicsP/E ✦ P/S ✦ P/B ✦ EV/EBITDA ✦ FCF YIELD ✦ DEBT/EQUITY ✦ GROSS MARGIN ✦ NET MARGIN
BEFORE YOU START
Every number comes from one of three places.
Valuation metrics are not new information. They are ratios built from figures a company already publishes—plus the share price the market sets each day.
Balance sheet
Assets, liabilities, and equity on one date. Source for book value, debt, and cash.
Cash flow statement
Cash actually moving in and out. Source for operating cash flow and capital expenditure.
THE EIGHT METRICS
What each ratio is telling you.
Read a metric as a question, not a verdict. A high number and a low number can each be good or bad depending on the business, the industry, and the moment.
Formula
Share price ÷ EPSEPS is earnings per share—net income divided by the number of shares outstanding.
Tells you: Price paid per $1 of profit.
High
Growth expectations—or an expensive share price.
Low
Undervalued—or weak growth ahead.
Where to find it: Share price from the ticker, EPS from the income statement
Formula
Market cap ÷ RevenueUseful for companies that are not yet profitable, where P/E cannot be calculated.
Tells you: Price paid per $1 of sales.
High
Growth is expected from those sales.
Low
Cheaper—or slower growth.
Where to find it: Market cap from the ticker, revenue from the income statement
Formula
Share price ÷ Book valueBook value = Assets − Liabilities.
Tells you: Market value compared with the assets on the books.
High
Intangible value not recorded on the balance sheet—or an expensive price.
Low
Undervalued—or weak assets.
Where to find it: Balance sheet
Formula
Enterprise value ÷ EBITDAEnterprise value = Market cap + Debt − Cash.
Tells you: Value including debt, measured against core operating profit.
High
Pricey—or high expected growth.
Low
Cheaper—or a mature business.
Where to find it: Balance sheet and income statement
Formula
(Free cash flow ÷ Market cap) × 100Free cash flow = Operating cash flow − Capital expenditure.
Tells you: How much real cash the business has left over.
High
Strong cash generation relative to price.
Low
Negative means heavy spending—or trouble.
Where to find it: Cash flow statement
Formula
Total debt ÷ Shareholder equityTells you: How much of the business is funded by borrowing.
High
More financial risk.
Low
Safer, with less dependence on lenders.
Where to find it: Balance sheet
Formula
((Revenue − COGS) ÷ Revenue) × 100COGS is the cost of goods sold—the direct cost of producing what is sold.
Tells you: How profitable the product itself is, before running costs.
High
Pricing power.
Low
Little pricing power.
Where to find it: Income statement
Formula
(Net income ÷ Revenue) × 100Net income is what remains after every expense, including interest and tax.
Tells you: How much of each sale the company actually keeps.
High
Very profitable.
Low
Thin margins.
Where to find it: Income statement
HOW TO USE THEM
One ratio is a hint. Several are a picture.
- Compare a company with its own history and with close competitors—not with a company in a different industry.
- Check whether profit is backed by cash. A strong income statement with weak free cash flow deserves a second look.
- Read valuation alongside risk. A cheap-looking ratio next to a high debt-to-equity figure is telling you two things at once.
- Ask what the number assumes about the future. High multiples usually price in growth that has not happened yet.
Lesson 01 slides
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Download the PDF Free to share and reuse for educational purposes.Educational content only. These metrics explain general principles of company analysis and are not personalized financial or investment advice.