Cut through the noise and learn the smart way to value a stock.
Researching a stock’s value can feel overwhelming. Dive too deeply into financial statements and the complexity becomes paralyzing; skim too lightly and you risk making an uninformed decision.
Financial indicators solve this problem.
They condense a company’s performance and outlook into simple, comparable metrics—giving investors a clearer picture of valuation, profitability, growth, and risk.
This guide walks you through the five essential indicators every investor should understand and how you can apply them to build a smarter investment strategy with Bitso.
Quick Summary: The 5 Key Indicators
- P/E → Shows valuation based on earnings
- PEG → Shows if the stock’s price aligns with expected growth
- ROE → Measures profitability and management efficiency
- P/B → Compares stock price to net asset value
- D/E → Shows how much debt the company uses
Combined, these metrics reveal whether a stock is undervalued, overvalued, profitable, sustainable, or risky.
The 5 Fundamental Indicators for Stock Valuation
🚀 Indicators of earnings
1. P/E Ratio (Price-to-Earnings)
Category: Valuation
Best for: Quick comparisons within the same sector
Difficulty: Beginner-friendly
What is the P/E ratio?
The P/E ratio shows how much investors are willing to pay for one dollar of a company’s earnings.
Formula
P/E = Stock Price ÷ Earnings Per Share (EPS)
How to interpret it
- High P/E → Market expects strong future growth
- Low P/E → Possibly undervalued or slower expected growth
Best use case
Use P/E to compare companies in the same industry, since different sectors naturally have different typical valuations.
2. PEG Ratio (Price/Earnings-to-Growth)
Category: Growth valuation
Best for: Fast-growing companies
What is the PEG ratio?
PEG improves the P/E ratio by adding expected earnings growth into the equation.
Formula
PEG = P/E ÷ Projected EPS Growth
How to interpret it
- PEG < 1 → Often considered undervalued
- PEG ≈ 1 → Fair value
- PEG > 1.5 → Price may be too high for expected growth
Why it matters
PEG helps determine whether a stock’s high P/E is justified by strong expected growth.
🚀 Profitability and Asset Indicators
3. ROE (Return on Equity)
Category: Profitability
Best for: Long-term and quality-focused investors
What is ROE?
ROE measures how effectively a company uses shareholders’ money to generate profits.
Formula
ROE = Net Income ÷ Shareholders’ Equity
How to interpret it
- High ROE → Efficient and profitable operations
- Declining ROE → Possible warning of inefficiencies
Advanced insight
Compare ROE to the company’s growth rate.
If growth consistently exceeds ROE, the business may be overstretching and its earnings may be unsustainable.
4. P/B Ratio (Price-to-Book)
Category: Asset valuation
Best for: Banks, automakers, industrials
What is the P/B ratio?
The P/B ratio compares the stock price to the company’s net assets (book value).
Formula
P/B = Stock Price ÷ Book Value Per Share
How to interpret it
- P/B = 1 → Stock trades at asset value
- P/B < 1 → Potential undervaluation
- P/B > 1 → Market expects growth or intangible value
When it’s useful
Best for companies with significant tangible assets. Less relevant for software, tech, or service companies.
Risk and Debt Indicators
5. D/E Ratio (Debt-to-Equity)
Category: Solvency & risk
Best for: Evaluating financial stability
What is D/E?
The D/E ratio shows how much debt a company uses compared to its equity.
Formula
D/E = Total Debt ÷ Shareholders’ Equity
How to interpret it
- D/E < 1 → Generally safer
- D/E > 2 → Potentially higher risk
Important note
Always compare D/E within the same industry, because leverage standards vary significantly.
| Indicator | Reveals | Good Sign | Caution Sign | Best For |
|---|---|---|---|---|
| P/E | Valuation | Below industry average | Very high without growth | Beginners & value analysis |
| PEG | Growth-adjusted valuation | < 1 | > 1.5 | Growth stocks |
| ROE | Profit efficiency | > 15% consistently | Volatile or falling | Long-term investors |
| P/B | Asset valuation | < 1 in asset-heavy sectors | Very high multiples | Banks, industrials |
| D/E | Leverage risk | < 1 | > 2 | Risk assessment |
The 4-Step Framework to Analyze Any Stock
Start with valuation
Check P/E and PEG to see whether price aligns with earnings and growth.
Check profitability
Use ROE to evaluate management efficiency and long-term sustainability.
Evaluate assets
Use P/B especially for asset-based sectors.
Assess financial risk
Review D/E to understand leverage and the stability of the business.
| Ratio | Company A | Company B | Interpretation |
|---|---|---|---|
| P/E | 12 | 28 | B is priced for higher growth |
| PEG | 0.9 | 1.6 | A may be undervalued |
| ROE | 18% | 10% | A is more efficient |
| P/B | 1.3 | 3.2 | B trades above asset value |
| D/E | 0.4 | 1.9 | B carries more debt risk |
Conclusion: Company A shows better valuation and risk balance.
Common Questions About Stock Valuation
How do I know if a stock is undervalued?
A stock may be undervalued when:
- P/E is lower than sector peers
- PEG is below 1
- P/B is under 1 (for asset-heavy companies)
- ROE is stable or improving
- D/E is low relative to competitors
What’s the simplest way to analyze a stock?
- Check P/E
- Confirm with PEG
- Look at ROE
- Review D/E
Which ratio is most important?
P/E is the simplest starting point, but P/E + PEG + ROE is the most reliable combination.
Do financial ratios predict future performance?
Not directly. They highlight trends, risk levels, and valuation relative to expectations.
Common Mistakes Investors Make
- Using only one metric
- Comparing companies from unrelated industries
- Ignoring debt when interest rates rise
- Believing low P/E always means “cheap”
- Overlooking declining ROE
Avoiding these mistakes leads to better decisions.
Where Can I Analyze These Indicators Easily?
You can evaluate global stocks using P/E, PEG, ROE, P/B, and D/E directly inside the Bitso app, with access to:
- Thousands of global stocks and ETFs
- Fractional investing from $20 pesos
- Zero trading fees
- Professional investment advisory services*
Build Your Investment Strategy With Bitso
Now that you understand the most important indicators for stock valuation, you’re ready to put your knowledge to work.
Open or download your Bitso app today and explore global markets to build your financial future—starting small, learning continuously, and investing smarter.
*Advisory 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
