The ancient Greeks proposed earth, fire, water and air as the main building blocks of all matter, and classified all things as a mixture of these elements. Investing has a similar set of four basic elements that investors use to break down a stock’s value. In this article, we will look at the four ratios and what they can tell you about a stock.

Earth: The Price-to-Book Ratio (P/B)

The reason for this is simple: a P/E ratio can be thought of as how long a stock will take to pay back your investment if there is no change in the business. A stock trading at $20 per share with earning of $2 per share has a P/E ratio of 10, which is sometimes seen as meaning that you’ll make your money back in 10 years if nothing changes. The reason stocks tend to have high P/E ratios is that investors try to predict which stocks will enjoy progressively larger earnings. An investor may buy a stock with a P/E ratio of 30 if he or she thinks it will double its earnings every year (shortening the payoff period significantly). If this fails to happen, then the stock will fall back down to a more reasonable P/E ratio. If the stock does manage to double earnings, then it will likely continue to trade at a high P/E ratio. You should only compare P/E ratios between companies in similar industries and markets. (If these numbers have you in the dark, these easy calculations should help light the way, see How To Find P/E And PEG Ratios .)

Air: The PEG Ratio

Because the P/E ratio isn’t enough in and of itself, many investors use the price to earnings growth (PEG) ratio. Instead of merely looking at the price and earnings, the PEG ratio incorporates the historical growth rate of the company’s earnings. This ratio also tells you how your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio of a company and dividing it by the year-over-year growth rate of its earnings. The lower the value of your PEG ratio, the better the deal you’re getting for the stock’s future estimated earnings.

By comparing two stocks using the PEG, you can see how much you’re paying for growth in each case. A PEG of 1 means you’re breaking even if growth continues as it has in the past. A PEG of 2 means you’re paying twice as much for projected growth when compared to a stock with a PEG of 1. This is speculative because there is no guarantee that growth will continue as it has in the past. The P/E ratio is a snap shot of where a company is and the PEG ratio is a graph plotting where it has been. Armed with this information, an investor has to decide whether it is likely to continue in that direction. (Has the P/E ratio lost its luster? The PEG ratio has many advantages over its well-known counterpart, check out Move Over P/E, Make Way For The PEG .)