INTERPRETATION OF FINANCIAL RATIOS
P/B ratio
The price to book ratio is calculated by dividing the market price of the share and the book value
of the equity per share. It is used to measure whether and how much a company is undervalued or
overvalued by the market. If this ratio is greater than 1, it means that the market gives the
company a value greater than its book value, so the latter is overvalued. Conversely, a ratio lower
than 1 indicates an undervalued company. We can say that a lower P/B ratio is better.
ROE
The return on equity is calculated by dividing the net income by the equity employed. It indicates
the ability to generate income from the assets. If this is high and P/B is low, we are facing an
undervalued company on the market. If the ROE is low and the P/B is high, we are in the opposite
situation: an overvalued company. The other combinations (low ROE and low P/B, high ROE and
high P/B) raise an alarm and invite caution on that title. Investors are attracted to stocks with low
P / BV and high ROE.
P/E ratio
The price to earnings ratio is calculated by dividing the price paid for a share and the earnings per
share, also called Earning Per Share (EPS). The higher P/E corresponds to a higher price paid by
investors for each unit (1€) of profit and therefore indicates that an action is more expensive
compared to others with lower P/E.
P/S ratio
The price to sales ratio is calculated by dividing the price paid for a share by the total sales or
revenue. Most analysts say that the optimal P/S ratio is equal to 1.5, meaning that the right price
(Fair Value) should be equal to one and a half times the turnover per share. A very low P/S ratio
(less than 1) could be an alarm signal where a very high P/S ratio (above 2) could be a sign of
confidence.