Valuation Ratios
Valuation ratios compare a stock's price to a measure of its underlying business value. They answer the key question: is this stock cheap or expensive relative to what the company produces?
The classic reference for all valuation multiples is Professor Damodaran's P/E ratio dataset by industry at NYU Stern, updated annually. Always compare multiples within the same industry, not across different sectors.
Profitability Ratios
These measure how efficiently a company converts revenue and assets into profit. Higher is generally better — but always benchmark against industry peers using Damodaran's ROE by sector dataset.
Leverage Ratios
Leverage ratios measure how much debt a company carries and whether it can service that debt comfortably. As BIS research on corporate leverage shows, companies with high debt-to-equity ratios underperform in economic downturns.
| Ratio | Formula | Healthy Range | Risk Signal |
|---|---|---|---|
| Debt/Equity | Total Debt ÷ Total Equity | < 1.0x for most sectors | > 2.0x without asset backing |
| Debt/EBITDA | Total Debt ÷ EBITDA | < 3.0x | > 5.0x signals distress |
| Interest Coverage | EBIT ÷ Interest Expense | > 3.0x | < 1.5x = paying interest is painful |
| Current Ratio | Current Assets ÷ Current Liabilities | 1.5x – 3.0x | < 1.0x = may struggle to pay bills |
Efficiency Ratios
Efficiency ratios reveal how well management deploys assets and manages working capital. They are especially important in capital-intensive industries like petrochemicals, industrials, and retail — sectors that dominate the TASI market sectors.
Growth Metrics
Growth is what drives future value. Always look at growth on a per-share basis (EPS growth, FCF per share growth) rather than aggregate — share issuance can inflate total earnings while diluting each shareholder's stake.
| Metric | What to Look For | Source |
|---|---|---|
| Revenue CAGR (3–5yr) | Consistent growth > 10% in growth companies | Income Statement over time |
| EPS CAGR (3–5yr) | Growing faster than revenue signals improving efficiency | Income Statement / EPS history |
| FCF per Share Growth | Most reliable growth indicator | Cash Flow Statement |
| Book Value per Share Growth | Measures compounding of equity value over time | Balance Sheet |
How to Use Ratios in Practice
No single ratio tells the full story. The CFA Institute recommends building a "ratio mosaic" — using valuation, profitability, leverage, and efficiency ratios together to form a complete picture.
The Piotroski F-Score, developed by Stanford accounting professor Joseph Piotroski, is a 9-point scoring system that combines profitability, leverage, and efficiency ratios. Academic research shows high F-score stocks (7–9) outperform low F-score stocks (0–2) by an average of 7.5% per year.
The TruePrice.Cash screener calculates all major ratios across TASI, S&P 500, JPX, and LSE automatically. Filter by P/E, ROE, Debt/Equity and more — with peer comparison built in.