Important Equity Market Related Metrics

1. Price-to-earnings (P/E) ratio: As stated earlier, it's not the stock price but valuation that tells you how expensive a stock is. The P/E ratio is one of the most important valuation tools. It is calculated by dividing the stock price by 'TTM' earnings. TTM stands for trailing twelve months. Hence, TTM earnings are the earnings of the last twelve months or four quarters.

A low P/E means a cheap stock. A high P/E means an expensive stock. But wait! Before you overgeneralise this statement, be informed that not all low P/E companies are good companies. Nor are all high P/E companies bad choices. It's the financial strength and the future outlook of a company that drive valuations. You need to dig deeper in order to know if a company's P/E is justified or not.

2. Price-to-earnings-growth (PEG) ratio: A better tool than the P/E ratio is the PEG ratio. It is calculated by dividing the current P/E of the stock by its earnings growth rate of a specific period. Don't worry about the underlying calculations; you can find readymade PEG on the stock pages on the Value Research website. A PEG of less than one implies cheap stocks, that of more than one an expensive stock and a PEG of around one indicates fairly priced stocks.

3. Price-to-book (P/B) ratio: The P/B ratio is another valuation tool. It is obtained by dividing the stock price by book value. Book value of a share is its worth in the company's books. A P/B of under one indicates a cheap stock. But beware, you can't read too much into this metric as book value isn't a very reliable tool; the actual worth of share could be very different from what the company thinks it to be.

4. Dividend yield: Dividends are the profits that companies share with their shareholders. Dividend yield is obtained by dividing the dividend per share by the stock price. The higher the dividend yield, the more money you get as dividends.