Basic Financial Metrics (PER, PBR, ROE, EPS)

Why Look at the Numbers at All

A chart shows you how price has moved historically. Financial metrics tell you something different: is this company actually making money, and is the current price cheap or expensive relative to how well it performs? Learn these four metrics and you'll have no trouble reading financial news or analyst reports.

EPS (Earnings Per Share)

A company's net income over the past year, divided by its number of shares outstanding.

EPS = Net income ÷ Shares outstanding

Example: $100 million in net income, 100 million shares outstanding → EPS = $1.00. This means "each share generated $1.00 of profit over the year." EPS is most useful as the input for the next metric, P/E.

P/E Ratio (Price to Earnings)

How many times the current price is relative to EPS — the most widely used valuation metric.

P/E = Current share price ÷ EPS

Example: Share price $20, EPS $1.00 → P/E = 20. This can be read as "it would take 20 years of the company's current earnings to add up to its current market cap."

• Low P/E → the price may be undervalued relative to earnings (though it could also mean the market expects low growth or sees risk factors and is intentionally pricing it lower)
• High P/E → the price may be overvalued relative to earnings, or the market may be pricing in high future growth

⚠️ P/E is only meaningful when compared within the same industry. Banking stocks and high-growth tech stocks naturally trade at very different average P/E levels. Comparing "this stock has a P/E of 8, that one has a P/E of 40, so the first one must be cheap" is misleading if they're in different industries.

P/B Ratio (Price to Book)

How many times the current price is relative to the company's net asset (book) value.

P/B = Current share price ÷ Book value per share

A P/B of 1 means "the company's current market cap equals what you'd get if you sold off the entire company, paid off all its debts, and kept what's left (net assets)." A P/B below 1 theoretically implies "the stock is priced below what you'd get from liquidating the company" — but in practice, this depends heavily on the quality of those assets (cash vs. hard-to-sell equipment, for instance).

ROE (Return on Equity)

A profitability metric showing how efficiently a company generates profit from shareholders' equity.

ROE = Net income ÷ Shareholders' equity × 100

Example: $1 trillion in equity generating $150 billion in net income → ROE = 15%. A company that generates more profit from the same amount of capital has a higher ROE, and a consistently high ROE is generally seen as a sign of efficient management.

💡 This is why famous value investors like Warren Buffett place such weight on ROE — a company that squeezes more profit out of the same capital is, all else equal, more valuable to shareholders over the long run.

Looking at These Metrics Together

Metric	Company A	Company B
P/E	8x	35x
P/B	0.7x	6x
ROE	6%	28%

On the surface, Company A looks "cheap," but its low ROE means it's not very efficient at generating profit. Company B looks "expensive," but its very high ROE suggests the market is pricing in a legitimate premium for that profitability. This is why it's important to look at several metrics together and understand why the numbers look the way they do, rather than judging "cheap" or "expensive" from a single number.

Free Cash Flow (FCF): Sometimes More Important Than Net Income

Net income can diverge from actual cash flow depending on accounting treatment. For example, revenue that's been recorded but not yet collected in cash (accounts receivable) still counts toward accounting profit. This is why many investors check Free Cash Flow (FCF) alongside net income.

FCF = Operating cash flow - Capital expenditures (CapEx)

FCF represents "the actual cash a company generated running its business, minus the capital spending needed to maintain and grow that business." A company with positive net income but persistently negative FCF can be a warning sign that reported profit and actual cash reality have diverged.

Debt-to-Equity: How Reliant a Company Is on Debt

Debt-to-Equity = Total debt ÷ Shareholders' equity × 100

A high debt-to-equity ratio means a company is funding its operations more with debt than with its own capital. Used well, debt can act as leverage that boosts ROE — but when the economy weakens or interest rates rise, the interest burden grows heavier and can put the company at real risk. "Normal" debt levels vary enormously by industry (banks and financial firms naturally run very high leverage, for instance), so like P/E, this metric is only meaningful compared within the same industry.

A Worked Example: Putting the Metrics Together

Suppose you're evaluating a stock and see the following:

P/E 15x, P/B 2x, ROE 13%, Debt-to-Equity 60%, FCF positive for 3 straight years

From this alone, you can form a reasonable first impression: if P/E and P/B are in line with the industry average, the stock isn't at an extreme (cheap or expensive); ROE of 13% suggests decent profitability; a 60% debt-to-equity ratio isn't dangerously high; and consistently positive FCF suggests accounting profit is actually translating into real cash. This alone isn't enough to decide to buy — the standard next step is comparing against industry peers and checking whether the trend over the past few years is improving or deteriorating.

Where to Find These Numbers

• US stocks: Your brokerage app, or the company's 10-K (annual) and 10-Q (quarterly) filings with the SEC
• Korean stocks: DART (the Financial Supervisory Service's electronic disclosure system), or the "financials" tab in most brokerage apps

Most brokerage apps display P/E, P/B, ROE, and EPS directly on a stock's info page, so you rarely need to calculate them by hand. What matters is being able to interpret what those numbers actually mean.

Summary

• EPS: Profit generated per share
• P/E: Price relative to earnings (lower can mean undervalued, but only meaningful within the same industry)
• P/B: Price relative to net asset value
• ROE: How efficiently a company turns shareholders' equity into profit

In the next lesson, we'll cover something you need regardless of how good a stock looks: the basics of risk management.