Stock valuation metrics are key financial tools that investors use to assess the relative value of a company’s stock. They help in determining whether a stock is overvalued, undervalued, or fairly valued compared to its financial performance, competitors, and the overall market. Here are some of the most widely used stock valuation metrics:

### 1. Price-to-Earnings Ratio (P/E Ratio)

**Formula**: Market Price per Share / Earnings per Share (EPS)**Purpose**: Evaluates how much investors are willing to pay for each dollar of earnings. A high P/E ratio often signals growth expectations, while a low ratio may suggest undervaluation or lack of growth prospects.

### 2. Price-to-Book Ratio (P/B Ratio)

**Formula**: Market Price per Share / Book Value per Share**Purpose**: Compares the market value to the book value (net asset value) of a company. A P/B ratio under 1 indicates that the stock is potentially undervalued relative to its assets.

### 3. Price-to-Sales Ratio (P/S Ratio)

**Formula**: Market Capitalization / Total Revenue**Purpose**: Shows how much investors value each dollar of sales. This metric is useful for companies that don’t have positive earnings.

### 4. Price/Earnings-to-Growth Ratio (PEG Ratio)

**Formula**: P/E Ratio / Annual EPS Growth Rate**Purpose**: Incorporates expected growth rates into valuation. A PEG ratio below 1 is generally seen as favorable, indicating the stock might be undervalued given its growth prospects.

### 5. Dividend Yield

**Formula**: Annual Dividends per Share / Market Price per Share**Purpose**: Reflects the return an investor can expect in the form of dividends. It is crucial for income-focused investors who prioritize dividends over capital gains.

### 6. Dividend Payout Ratio

**Formula**: Annual Dividends per Share / Earnings per Share (EPS)**Purpose**: Indicates what portion of earnings is paid out as dividends. A lower payout ratio can imply that a company retains more earnings for growth.

### 7. Enterprise Value-to-EBITDA (EV/EBITDA)

**Formula**: Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization**Purpose**: Offers insight into a company’s valuation considering both equity and debt financing. A low ratio might signify undervaluation.

### 8. Free Cash Flow Yield

**Formula**: Free Cash Flow per Share / Market Price per Share**Purpose**: Measures a company’s ability to generate cash relative to its stock price. Higher yields generally suggest better value.

### Conclusion

Stock valuation metrics serve different purposes, and using them in combination provides a comprehensive view of a company’s financial health and potential investment value. Investors should consider the company’s industry, growth prospects, and market conditions while analyzing these metrics to make more informed investment decisions.

## Stock valuation calculator

To create a basic stock valuation calculator, it’s essential to have formulas that incorporate key financial metrics such as the price-to-earnings ratio, dividend yield, and others. Here’s a guide to calculating these metrics manually or through a spreadsheet.

### Essential Stock Valuation Formulas:

**Price-to-Earnings Ratio (P/E)**P/E Ratio=Market Price per ShareEarnings per Share (EPS)P/E Ratio=Earnings per Share (EPS)Market Price per Share**Market Price per Share**: The current trading price of a single share.**EPS**: Annual earnings per share.

**Price-to-Book Ratio (P/B)**P/B Ratio=Market Price per ShareBook Value per ShareP/B Ratio=Book Value per ShareMarket Price per Share**Book Value per Share**: (Total Assets – Total Liabilities) / Number of Outstanding Shares.

**Dividend Yield**Dividend Yield=Annual Dividends per ShareMarket Price per ShareDividend Yield=Market Price per ShareAnnual Dividends per Share**Annual Dividends per Share**: The total dividends paid out over a year.

**Price-to-Sales Ratio (P/S)**P/S Ratio=Market CapitalizationTotal Annual RevenueP/S Ratio=Total Annual RevenueMarket Capitalization**Market Capitalization**: Market Price per Share * Number of Outstanding Shares.

**PEG Ratio (Price/Earnings to Growth)**PEG Ratio=P/E RatioAnnual EPS Growth RatePEG Ratio=Annual EPS Growth RateP/E Ratio**Annual EPS Growth Rate**: Expected annual growth rate of EPS.

**EV/EBITDA Ratio**EV/EBITDA Ratio=Enterprise ValueEarnings Before Interest, Taxes, Depreciation, and AmortizationEV/EBITDA Ratio=Earnings Before Interest, Taxes, Depreciation, and AmortizationEnterprise Value**Enterprise Value (EV)**: Market Capitalization + Total Debt – Cash and Cash Equivalents.

### Example Calculation

Assume a stock with the following details:

- Market price per share: $50
- EPS: $5
- Annual dividend per share: $2
- Book value per share: $25
- Market capitalization: $10 billion
- Annual revenue: $3 billion
- Annual EPS growth rate: 10%
- Total debt: $2 billion
- Cash: $1 billion
- EBITDA: $1.5 billion

Using the formulas:

**P/E Ratio**505=10550=10**P/B Ratio**5025=22550=2**Dividend Yield**250=0.04=4%502=0.04=4%**P/S Ratio**10,000,000,0003,000,000,000=3.333,000,000,00010,000,000,000=3.33**PEG Ratio**1010=11010=1**EV/EBITDA Ratio**10,000,000,000 + 2,000,000,000 – 1,000,000,0001,500,000,000=11,000,000,0001,500,000,000≈7.331,500,000,00010,000,000,000 + 2,000,000,000 – 1,000,000,000=1,500,000,00011,000,000,000≈7.33

These calculations can be incorporated into a spreadsheet to automate the process. You can input the formulas into your preferred software (Excel, Google Sheets, etc.) and adjust as needed with different data points.