Valuation Ratios

What this video covers

• The P/E ratio formula (market price per share divided by earnings per share), and why a P/E of 20 means investors pay $20 for every $1 of current earnings
• The two types of P/E: trailing price-to-earnings (trailing P/E) using past 12-month earnings versus forward price-to-earnings (forward P/E) using analyst estimates
• Why a low P/E does not automatically mean "buy" and a high P/E does not automatically mean "overvalued," since context about growth prospects or decline is required
• The P/B ratio formula (market price per share divided by book value per share), and the waterfall calculation for book value per common share (total assets minus total liabilities minus preferred stock, then divided by common shares outstanding)
• Why preferred stock is subtracted before arriving at book value per common share: preferred stockholders have priority claims ahead of common shareholders in liquidation
• When P/B is useful (capital-intensive industries such as banking, insurance, manufacturing, and real estate) versus when it fails (asset-light tech and service firms where intangible value dominates)
• The golden rule of ratio analysis: never use a valuation ratio in isolation; always compare to historical trends, industry peers, and broader market benchmarks