Valuation Ratios
Standard equity valuation ratios used in index analysis and stock screening, beyond the basic P/E and P/B ratios tracked in index-snapshot-metrics. These metrics help determine whether individual stocks or entire indices are trading at fair value relative to earnings, growth, sales, and cash generation.
Core Valuation Ratios
| Metric | Formula | Use |
|---|---|---|
| PEG Ratio | P/E ÷ EPS Growth Rate | Adjusts P/E for growth; < 1 = undervalued relative to growth |
| CAPE / Shiller P/E | Price ÷ 10-year inflation-adjusted avg EPS | Long-term valuation; > 25 historically expensive |
| EV/Sales | Enterprise Value ÷ Revenue | Useful for unprofitable growth companies; < 1 = cheap |
| Free Cash Flow Yield | FCF ÷ Market Cap | Cash return to investors; > 5% is attractive |
| Earnings Yield | EPS ÷ Price (inverse of P/E) | Compare directly to bond yields; > 10yr Treasury = equities attractive |
PEG Ratio
Quote
“The P/E ratio of any company that’s fairly priced will equal its growth rate.”
— Peter Lynch, One Up on Wall Street (1989)
The PEG ratio adjusts the price-to-earnings ratio by the company’s earnings growth rate, providing a growth-adjusted valuation measure.
| PEG | Interpretation |
|---|---|
| < 1.0 | Potentially undervalued relative to growth |
| 1.0 | Fairly valued (P/E matches growth rate) |
| > 1.0 | Premium to growth rate |
| > 2.0 | Expensive even accounting for growth |
PEG Limitations
PEG ratios are unreliable when EPS growth is negative (negative denominator), near zero (inflates PEG), or cyclical (one-year growth misleads). Use with forward consensus estimates for best results.
CAPE / Shiller P/E
Quote
“The price-earnings ratio, averaged over ten years, is a strong predictor of the real rate of return on stocks over the subsequent ten years.”
— Robert Shiller, Irrational Exuberance (2000)
The Cyclically Adjusted Price-to-Earnings ratio smooths earnings over a 10-year period, adjusting for inflation. Created by Robert Shiller, this metric reduces the impact of business cycle fluctuations.
| CAPE Level | Historical Context |
|---|---|
| < 15 | Historically cheap (strong future returns likely) |
| 15–20 | Fair value range |
| 20–25 | Above average (moderate future returns) |
| > 25 | Historically expensive (lower future returns) |
| > 30 | Bubble territory (1929, 2000, 2021) |
EV/Sales (Enterprise Value to Sales)
Particularly useful for high-growth companies that may not yet be profitable, where P/E is meaningless.
| EV/Sales | Interpretation |
|---|---|
| < 1 | Trading below revenue — potentially deep value |
| 1–3 | Reasonable for mature companies |
| 3–10 | Growth premium, justified if margins expand |
| > 10 | Requires extraordinary growth to justify |
Free Cash Flow Yield
Quote
“In the long run, earnings and cash flow are all that matter. The rest is noise.”
— Bill Miller
Measures the cash return a company generates relative to its market capitalization. More reliable than earnings yield because free cash flow is harder to manipulate than accounting earnings.
| FCF Yield | Interpretation |
|---|---|
| > 8% | Strong cash generation, potentially undervalued |
| 5–8% | Attractive |
| 2–5% | Average |
| < 2% | Growth company or low cash generation |
| Negative | Burning cash — check health warnings |
Earnings Yield
Quote
“Price is what you pay. Value is what you get.”
— Benjamin Graham, The Intelligent Investor (1949)
The inverse of P/E, earnings yield enables direct comparison with bond yields — the “Fed Model” framework.
Bond Comparison
When earnings yield exceeds the 10-year Treasury yield, equities are relatively attractive versus bonds. This spread widening often signals value opportunities.
Dashboard Valuation Metrics
The dashboard tracks these cap-weighted index-level valuation metrics daily:
| Metric | Source | Thresholds |
|---|---|---|
| P/E | yfinance forwardPE | < 15 cheap · > 25 expensive |
| P/B | yfinance priceToBook | < 1.5 value · > 3 growth premium |
| Dividend Yield | yfinance dividendYield | > 3% attractive for income |
The Relative Value Score uses inverted z-scores of Forward P/E, Price/Book, EV/EBITDA, and Dividend Yield to rank constituents by relative cheapness within their index.
Related
- index-snapshot-metrics — Dashboard-level P/E, P/B, dividend yield
- daily-signal-scores — Relative value composite score using valuation z-scores
- quarterly-signal-scores — Quality/moat score using fundamental ratios
- technical-indicators — Price-based momentum and trend indicators
- scoring-methodology — Z-score calculation methodology