Valuing stocks means more than just looking at the price. Fundamental ratios help estimate a company's intrinsic value and determine whether a stock is expensive, fairly priced or cheap. This guide explains the most important ratios, how to interpret them correctly and which pitfalls to avoid. At the end, you will find practical tips and an overview of tools to quickly and reliably analyze the figures.
Why Ratios Alone Are Not Enough – and Why They Are Still Indispensable
Ratios are like a compass: they show direction, but they replace neither map nor experience. A low P/E can indicate a bargain price – or a company in decline. A high dividend yield sounds tempting – until you realize the payout is no longer covered. The art lies in viewing ratios in context: industry, growth, interest rate environment, management quality and macroeconomic situation all play a role. Nevertheless: Without ratios, there is no objective basis.
The 10 Most Important Ratios at a Glance
| Ratio | Formula | Interpretation | Typical „good“ range | Industry note |
|---|---|---|---|---|
| Price-to-Earnings Ratio (P/E) | Share price ÷ Earnings per share | How many years does it take to recover the price through earnings? | 10–20 (depending on industry) | Tech often 25–50+, banks/insurers 8–15 |
| Price-to-Book Ratio (P/B) | Share price ÷ Book value per share | How expensive is the equity? | < 1.5 ideal | Financials often <1, tech often >5 |
| Price-to-Sales Ratio (P/S) | Share price ÷ Sales per share | How expensive is sales? | < 2 ideal | Growth companies often 5–15 |
| Dividend Yield | Dividend per share ÷ Share price × 100 | How high is the ongoing yield? | 3–6 % sustainable | Utilities, consumer goods often high, tech usually low |
| Return on Equity (ROE) | Profit ÷ Equity × 100 | How efficiently is equity used? | >15 % good | Consumer & tech often high, banks distorted by leverage |
| PEG Ratio | P/E ÷ Expected earnings growth (%) | Accounts for growth in P/E | < 1 cheap | Only meaningful for growth companies |
The table shows the core ratios with typical guideline values. Important: There are no universal „good/bad“ limits – always compare industry and history.
How to Interpret Ratios Correctly
Looking at individual ratios in isolation is risky. Here are the most important rules:
- Industry and peer comparison is mandatory: A P/E of 12 can be cheap for a bank, but expensive for a software company.
- Consider historical development: Is the P/E falling because earnings are rising or because the price is falling?
- Forward vs. Trailing Ratios: Forward P/E is often more meaningful than past figures.
- Include interest rate environment: In low-interest phases, higher P/Es are normal; in high-interest phases, low P/Es are preferred.
- Absolute vs. relative valuation: „Cheap“ is not automatically a buy – a low P/E can also be a value trap (company in structural decline).
- Combine multiple ratios: A company with low P/E, high ROE, rising free cash flow and solid balance sheet is usually more attractive than one with only one „cheap“ ratio.
Practical Examples (as of 2026)
A short comparison of three companies shows how differently ratios can turn out:
- VW AG (DAX): P/E ~4–5, P/B ~0.4, dividend yield ~7–8 %. Very low valuation, but high debt and dependence on combustion engines → classic value title with risk.
- NVIDIA (Nasdaq): Forward P/E ~35–40, PEG ~1.2, ROE >70 %. High valuation, but extreme growth and leadership in AI chips → typical growth title.
- Allianz SE (DAX): P/E ~10–11, dividend yield ~5 %, ROE ~12–14 %. Solid, sustainable dividend, stable earnings → classic dividend aristocrat.
These examples show: There is no „right“ or „wrong“ – only what fits the strategy (value, growth, dividend) and personal risk tolerance.
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Ratios are a powerful tool, but not an oracle. They help better assess intrinsic value and avoid emotional decisions. Anyone who uses them correctly – i.e. always in industry, historical and context comparison – has a clear advantage. Important: No single ratio decides alone – combine it with fundamental analysis, industry trends and management quality.
Risk notice: Investing in stocks and other securities involves risks and can lead to the total loss of invested capital. The ratios mentioned here are not investment advice. Every investment decision is your own responsibility. Inform yourself thoroughly and consult an independent financial advisor if necessary.
Anyone who wants to analyze and trade the ratios in real time will find a neutral overview here of established platforms that cover almost the entire range of assets: To the Trading Platform Overview.
