Valuation ratios, measured by metrics like Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios, are crucial in assessing whether a stock is fairly priced, overvalued, or undervalued. The P/E ratio helps investors understand how much they are paying for a company’s earnings, while the P/B ratio compares a stock’s market price to its book value, indicating how the market values its assets.

Comparing current valuations to historical averages can give critical insights about asset value and guide decisions.
It can help investors avoid overpriced stocks and identify potential bargains, ultimately improving long-term returns.