Cut the noise: the smart way to value a stock
Researching a stock’s value might feel overwhelming. If you delve too deep into details, complexity can cloud your vision; if you investigate too little, you risk making a bad decision.
So, what can you do to make informed decisions?
The answer lies in financial indicators. These cut through the noise of earnings reports, offering a quick and comparable perspective.
In this guide, we explain the fundamentals to understanding five indicators that are essential in your stock investment strategy:
- Price-to-Earnings (P/E)
- Price/Earnings-to-Growth (PEG)
- Return on Equity (ROE)
- Price-to-Book (P/B)
- Debt-to-Equity (D/E)
Used in combination, these indicators give a clear idea of a company’s financial position relative to its market valuation.
Indicators of earnings
Investors buy stocks anticipating future earnings. Therefore, the key metrics are the price relative to earnings and the price relative to growth.
1. Price-to-Earnings Indicator (P/E)
The Price-to-Earnings indicator, or Price-to-Earnings ratio, is the most common indicator for knowing how well valued a stock is. This indicator shows how much investors are willing to pay for a stock relative to its earnings.
- Simple calculation: It is obtained by dividing the current stock price by the company’s earnings per share (EPS).
- Practical meaning: The final result (the number) reflects the growth expectation the market has for that company.
- Growth context: Companies that are growing faster usually have higher P/E indicators because the market expects them to generate more earnings in the future.
2. Price/Earnings-to-Growth Indicator (PEG)
The PEG indicator provides a more complete picture of a stock’s future growth prospects. It compares the P/E with the analysts’ projected earnings growth estimate.
- Formula: P/E divided by the projected earnings per share (EPS) growth.
- General rule: Typically, stocks with a PEG indicator less than 1 are considered undervalued.
- Advantage: This indicator incorporates the growth factor, which is key for the investor.
Indicators of equity and debt
Shareholders’ equity is what shareholders will own if the company sells all its assets and pays all its debts.
3. Return on Equity (ROE)
Return on Equity (ROE) is a key profitability indicator. It measures the return shareholders receive for investing in the stock in the long term.
- Simple calculation: Net income divided by shareholders’ equity.
- Sustainability: Comparing ROE with the company’s growth rate helps determine if earnings are sustainable. If growth is higher than ROE, there could be a challenge on the horizon.
4. Price-to-Book Indicator (P/B)
The Price-to-Book indicator measures how much stock buyers are paying for a company’s net assets.
- Simple calculation: Stock price divided by book value per share.
- Key Indicators:
- A P/B of 1 indicates that stocks are trading in line with their equity.
- A P/B less than 1 may suggest the stock is undervalued relative to the company’s assets.
- Note: This indicator is more useful for capital-intensive companies (like automakers) than for companies with intangible assets (like software).
5. Debt-to-Equity Indicator (D/E)
The Debt-to-Equity indicator (D/E) considers a company’s debt burden relative to shareholders’ equity. It is a solvency indicator that shows whether a company can manage its loans.
- General rule: Generally, investors prefer the D/E indicator to be less than 1.
- Risk: An indicator of 2 or higher could be interpreted as a higher risk, raising questions about whether the company has enough cash flow to cover its debt payments.
- Context: It is essential to compare a stock’s D/E with other companies in the same sector, as some industries tend to carry more debt.
Take control, design your strategy with Bitso
Analysts use these financial indicators to get a snapshot of a company’s results and make clear comparisons.
Although analysis doesn’t reveal everything, it gives you a good view of valuation, growth, and debt burden.
It is time to put knowledge to work and design your strategy.
At Bitso, you have access to advisory services and can invest in global stocks and ETFs, allowing you to:
- Diversify: Access thousands of global stocks and ETFs to build a portfolio.
- Start small: Begin your investment from $20 pesos with fractional investing.
- Zero Fees: Trade stocks with zero trading fees.
Open or download your Bitso app today and explore the stock market to build your future.
Services offered by the independent investment advisor The Badger Management House Independiente, registered under folio 30205-001-(16900)-22/07/2025. The CNBV exclusively supervises advisory and securities investment services. Consult more details at The Badger Management House
