Value investors analyze stock market metrics on companies to help them find stocks that they consider undervalued. Financial ratios are one of the main types of indicators that value investors use; below is a brief description of two of these value investing indicators:
• Price-to-Earnings Ratio – this metric measures the value of a stock against a company’s earnings. The P/E ratio, as it is referred to, reflects what the market is willing to pay for a stock as a multiple of its past earnings. A low P/E ratio signals that a stock may be undervalued, other market factors being equal.
• Price-to-Book Ratio – this is a metric that compares the value of the company’s assets and liabilities against its stock price. This ratio basically divides a stock’s share price against its book value to come to a book value per share (BVPS) ratio. A ratio below one means that the stock is trading below its underlying asset valuation and could be a good buy.