Looking at a stock's price alone is not enough to determine whether it is undervalued. Before deciding whether to buy a stock, it is important to assess the company's financial condition and valuation by reviewing its financial statements. One way to do this is by understanding financial ratios such as PER, PBV, ROE, and DER. So, what does each ratio mean? Here's what you need to know.

Why Are Financial Ratios Important to Investors?

Financial statements contain a lot of numbers, but financial ratios make them easier to interpret. PER and PBV help assess valuation, ROE measures a company's ability to generate profits, while DER indicates how much debt a company uses relative to its equity.

PER: Assessing Stock Price Based on Earnings

The Price-to-Earnings Ratio (PER) compares a stock's price with its earnings per share (EPS). The formula is:

PER = Stock Price ÷ EPS

For example, if a stock is priced at Rp2,000 and its EPS is Rp200, its PER is 10 times. This means the stock is valued at 10 times its earnings per share.You can compare a company's PER with those of similar companies or with its historical PER to help assess its valuation.

PBV: Comparing Stock Price with Book Value

The Price-to-Book Value (PBV) ratio compares a stock's market price with its book value per share. The formula is:

PBV = Stock Price ÷ Book Value per Share

For example, if a stock is priced at Rp1,500 and its book value per share is Rp1,000, its PBV is 1.5 times. However, PBV should ideally be compared with similar companies because different industries have different characteristics.

 

ROE: Measuring a Company's Ability to Generate Profits

Return on Equity (ROE) measures how effectively a company generates profits from its shareholders' equity. The formula is:

ROE = Net Income ÷ Equity × 100%

For example, if a company has net income of Rp100 million and equity of Rp500 million, its ROE is 20%. A high ROE can be a positive signal, but you should also consider the company's debt level and the quality of its earnings.

DER: Assessing a Company's Use of Debt

The Debt-to-Equity Ratio (DER) shows how much debt a company has relative to its equity. The formula is:

DER = Total Debt ÷ Equity

For example, if a company has Rp300 million in debt and Rp600 million in equity, its DER is 0.5 times. A high DER is not necessarily a bad sign because debt requirements vary across industries. Therefore, DER should be compared with companies in the same industry.

How to Read PER, PBV, ROE, and DER Together

Don't simply look for stocks with the lowest PER or PBV. Use all four ratios to gain a more complete picture of a company's financial condition.

• PER and PBV: Assess stock valuation.
• ROE: Evaluate the company's ability to generate profits.
• DER: Assess the company's capital structure and use of debt.

Complete Your Analysis Before Choosing a Stock

Financial ratios can help you evaluate stocks, but they should not be the only factors you consider. Complement your stock analysis by examining earnings growth, cash flow, industry prospects, and the company's business performance. You can also use financial statements and market research to make more informed investment decisions.

To support your investment activities, securities companies registered with and supervised by the Financial Services Authority (OJK), such as Mandiri Sekuritas through its digital platform Growin', can help you access information, execute trades, and monitor your stock investment performance conveniently.

PER, PBV, ROE, and DER provide different perspectives on a company, from valuation and profitability to its use of debt. Understanding these four ratios can help you make more informed investment decisions based on your financial goals and risk profile. Growin' by Mandiri Sekuritas makes it easy to trade stocks and monitor your investments in one platform.

 

FAQ

Does a low PER always mean a stock is cheap?

Not necessarily. PER should be compared with similar companies, as well as the company's business conditions and growth prospects.

 

Why can technology companies have very different PERs from banks?

Each sector has different business characteristics, growth rates, and financial structures, which can result in significant differences in PER.

 

Can PBV be negative?

Yes. A negative PBV can occur when a company's equity is negative.

 

What ROE is considered attractive?

There is no single ROE figure that applies to every company. ROE is best evaluated by comparing it with similar companies and the company's historical performance.

 

Does a high DER always indicate that a company is in trouble?

No. DER should be evaluated based on the characteristics of the industry and the company's financing requirements.

 

What if PER, PBV, ROE, and DER give different signals?

Don't make an investment decision based on these ratios alone. Consider them alongside the company's financial statements, business prospects, and other fundamental factors.