What do financial ratios like P/E and EV/EBITDA help to assess?

Financial ratios like price-to-earnings (P/E) and enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) are primarily used to evaluate a company's valuation and overall financial health in relation to its peers.

The P/E ratio measures the current share price relative to its earnings per share, providing insight into what investors are willing to pay today for a dollar of earnings. A high P/E may indicate that the market has high expectations for a company's future growth. On the other hand, EV/EBITDA provides a valuation metric that takes into account the company's overall enterprise value, including debt, and its earnings potential, offering a clearer picture of how the market values a company regardless of its capital structure.

These ratios enable investors and analysts to compare the financial performance and value of companies within the same industry, thus assessing whether a stock is overvalued or undervalued. They help in determining intrinsic value—what a company is fundamentally worth—while also providing insights into extrinsic value by reflecting market sentiment and comparatives among competitors. This comparison aspect is crucial for making informed investment decisions.

The other options do not align with the primary purpose of P/E and EV/EBITDA