Value Investing: How to Use P/E and P/B Ratios to Find Undervalued Stocks
Value investing involves buying shares or other assets that appear to be trading below their underlying value, then selling when they become overvalued. Investors assess company financial statements and use measures such as earnings per share, sales growth and asset value to make these decisions. Two widely used tools are the price-to-earnings (P/E) ratio and price-to-book (P/B) ratio. The P/E ratio compares a company’s share price with its earnings per share, showing how much investors are paying for each unit of earnings. A lower P/E can suggest better value, but it should be compared mainly with companies in the same industry. The P/B ratio compares a share price with the company’s net tangible assets, excluding intangibles such as goodwill. It can help investors judge whether they are paying a reasonable price for a company’s underlying assets. Neither ratio should be used alone; debt levels, growth prospects, cash flow and industry conditions also matter.
Use The App To Win ₦1m
Stories are shared by community members. This article does not represent the official view of NaijaWorld — the author is solely responsible for its content.