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INVESTMENT FUNDAMENTALS Performance metrics: Evaluating stocks. ©2024 SEI® 1 While a company's performance metrics can tell you a great deal about its qualities as an investment, interpreting them can feel overwhelming. A basic understanding of key metrics can boost your investment acumen and help you feel more confident when researching stocks or conversing with your financial advisor. Fundamental analysis refers to the process of using data to determine a company's value. Investors use key data points to determine whether or not to invest in a company's shares. This process is also known as bottom-up investing. Although by no means all the measures used in fundamental analysis, some of the most popular include: Earnings per share (EPS) Earnings per share is one of the most used metrics investors use to value a company. Specifically, it reflects a company's profitability per share of stock. It is calculated by dividing a company's net profit by its number of outstanding shares of common stock. The characteristic reflects a company's profitability—put simply, higher EPS indicates stronger profitability. Price-to-earnings (P/E) ratio The price-to-earnings ratio compares a company's stock price against its earnings per share. The P/E ratio helps determine whether a company is over or undervalued: a relatively higher P/E ratio indicates a stock is more costly relative to its earnings. So-called "value" investors intentionally focus on low P/E stocks on the theory that undervalued companies will eventually rise to their rightful prices. It is important to keep in mind that P/E ratios can vary by industry. As such, when comparing P/E ratios, it is most useful to look at companies within the same industry. Price-to-book (P/B) ratio Price-to-book ratio reflects a company's current stock price per share compared to its book value per share. Book value refers to the actual value of a business according to its financial statements; effectively it is the company's value in accounting terms, as opposed to its market value. As with P/E ratio, the P/B ratio is another tool to analyze a company's relative value. A P/B ratio of less than one signals that a stock is trading at a discount to its book value, potentially suggesting a bargain. Debt-to-equity (D/E) ratio A debt-to-equity ratio evaluates a company's liabilities (what it owes) relative to its shareholder's equity (a company's net worth, calculated as assets less liabilities). This ratio emphasizes a company's level of debt. In extreme cases, if a company owes more than it has on its books, this presents a potential risk to shareholders. In these terms, a lower debt-to-equity ratio indicates less risk, while a higher ratio is a sign of higher risk.