P/E Ratio, P/B Ratio, Dividend Yield: What Do These Numbers Really Tell You?

When you’re looking at a stock, you’re not just looking at a ticker symbol or a price. You’re looking at a story—a business. And sometimes, the clearest way to understand that story is through a few simple numbers called ratios.

They might look intimidating at first, but trust me—they’re just your investment GPS. Let’s break down three of the most useful ones.

1. P/E Ratio (Price-to-Earnings)

What is it?
The P/E ratio shows how much investors are willing to pay for each dollar of a company’s earnings.

Formula:
P/E = Share Price / Earnings per Share (EPS)

How to read it:

• Low P/E → The stock might be undervalued (but don’t forget to ask why).
• High P/E → Might seem expensive, but could reflect high growth expectations.

Pro tip: Compare it to industry peers for context. A high P/E in tech might be normal. In utilities? Maybe not.

2. P/B Ratio (Price-to-Book)

What is it?
It compares a company’s market value to its book value (what it’s “worth on paper”).

Formula:
P/B = Market Value / Book Value (Shareholders’ Equity)

How to read it:

• P/B < 1 → The stock is trading below its book value. Could be a bargain—or a warning.
• P/B > 1 → Investors expect future growth beyond the company’s current assets.

Keep in mind: For asset-heavy businesses (like banks or real estate), this ratio matters a lot. For tech firms? Not so much.

3. Dividend Yield

What is it?
This tells you how much a company pays in dividends relative to its stock price. Think of it as your investment’s “cash back” rate.

Formula:
Dividend Yield = Annual Dividend / Share Price

How to read it:

• High yield → Attractive for income-seeking investors.
• But beware: A super high yield might signal trouble (unsustainable payouts or lack of growth).

Balance is key. A healthy yield with steady growth is the real win.

So… Why Do These Ratios Matter?

Because they help you see a company beyond the hype or headlines. They give you clues about value, risk, and return potential. But remember: no single ratio tells the whole story.

You wouldn’t judge a car only by its top speed, right? Same with stocks. Use multiple metrics, and think long-term.

Final Thoughts

Learning to read financial ratios is like learning a new language—the language of smart investing. It might feel confusing at first, but once you get it, you won’t want to invest without it.

Because smart investors don’t just buy stocks—they understand what they’re buying.