8 Financial Ratio Analysis that Every Stock Investor Should Know!

List of Must Know Financial Ratio Analysis for Stock Market Investors: Evaluating a company is a very tedious job. Judging the efficiency and true value of a company is not an easy task it demands rigorously reading the company financial statements like balance sheet, profit and loss statements, cash-flow statement, etc.

Since it is tough to go through all the information available on a company’s financial statements, the investors have found some shortcuts in the form of financial ratios. These financial ratios are available to make the life of a stock investor comparatively simple. Using these ratios, the stock market investors can choose the right companies to invest in or can compare the financials of two companies to find out which one is a better investment opportunity.

In this post, we are going to discuss eight of such Financial Ratio Analysis that Every Stock Investor Should Know.

This article is divided into two parts. In the first part, we’ll cover the definitions and examples of these eight must know financial ratios. In the second part, after the financial ratio analysis, we’ll discuss how and where to find these ratios. Therefore, be with us for the next 8-10 minutes to enhance your stock market analysis knowledge. Let’s get started.

Quick note: Do not worry much about calculations of these ratios or try to mug up the formulas by-heart. All these financial ratios are easily available on various financial websites. Nonetheless, we will recommend you to understand the basics of the financial ratio analysis as it will be helpful in building a good foundation for your stock research in future.

PART A: 8 Financial Ratio Analysis For Stock Investor

1. Earnings Per Share (EPS)

EPS is the first most important ratio in our list. It is very important to understand Earnings per share (EPS) before we study any other ratios, as the value of EPS is also used in various other financial ratios for their calculation.

EPS is basically the net profit that a company has made in a given time period divided by the total outstanding shares of the company. Generally, EPS can be calculated on an Annual basis or Quarterly basis. Preferred shares are not included while calculating EPS.

Earnings Per Share (EPS) = (Net income – Dividends from preferred stock)/(Average outstanding shares)

From the perspective of an investor, it’s always better to invest in a company with higher and growing EPS as it means that the company is generating greater profits. Before investing in any company, you should always check past EPS for the last five years. If the EPS is growing for these years, it’s a good sign and if the EPS is regularly falling, stagnant or erratic, then you should start searching for another company.

2. Price to Earnings (PE) Ratio

The Price to Earnings ratio is one of the most widely used financial ratio analysis among investors for a very long time. A high PE ratio generally shows that the investor is paying more for the share. The PE ratio is calculated using this formula:

Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)

Now let us look at the components of the PE ratio. It’s easier to find the price of the share which is the current closing stock price. For the earnings per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS i.e. Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past twelve month’s performance of the company.

For example, a company with the current share price of Rs 100 and EPS of Rs 20, will have a PE ratio of 5. As a thumb rule, a low PE ratio is preferred while buying a stock. However, the definition of ‘low’ varies from industries to industries.

Different industries (Ex Automobile, Banks, IT, Pharma, etc) have different PE ratios for the companies in their industry (Also known as Industry PE). Comparing the PE ratio of the company of one sector with the PE ratio of the company of another sector will be insignificant. For example, it’s not much use to compare the PE of an automobile company with the PE of an IT company. However, you can use the PE ratio to compare the companies in the same industry, preferring one with low PE.

3. Price to Book (PBV) Ratio

Price to Book Ratio (PBV) is calculated by dividing the current price of the stock by the book value per share. Here, Book value can be considered as the net asset value of a company and is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Here’s the formula for PBV ratio:

Price to Book Ratio = (Price per Share)/( Book Value per Share)

PBV ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower PBV ratio could mean that the stock is undervalued.

However, again the definition of lower varies from industry to industry. There should be an apple to apple comparison while looking into PBV ratio. The price to book value ratio of an IT company should only be compared with PBV of another IT company, not any other industry.

4. Debt to Equity (DE) Ratio

The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity).

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier as it means that a company is using more leverage and has a weaker equity position. As a thumb of rule, companies with a debt-to-equity ratio of more than one are risky and should be considered carefully before investing.

5. Return on Equity (ROE)

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders’ equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.

Return on Equity = (Net Income)/(Average Stockholder Equity)

As a thumb rule, always invest in a company with ROE greater than 20% for at least the last 3 years. Year-on-year growth in ROE is also a good sign.

6. Price to Sales Ratio (P/S)

The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.

Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.

7. Current Ratio

The current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. The current ratio can be calculated as:

Current Ratio = (Current Assets)/(Current Liabilities)

This ratio tells the company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable. As a thumb rule, always invest in a company with a current ratio greater than 1.

8. Dividend Yield

A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. Mathematically, it can be calculated as:

Dividend Yield = (Dividend per Share)/(Price per Share)*100

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%.

A lot of growing companies do not give dividends, rather reinvest their income in their growth. Therefore, it totally depends on the investor whether he wants to invest in a high or low dividend yielding company. Anyways, as a thumb rule, consistent or growing dividend yield is a good sign for dividend investors.

Also Read: 4 Must-Know Dates for a Dividend Stock Investor

PART B: Finding Financial Ratios

Now that we have understood the key financial ratio analysis, next we should move towards where and how to find these financial ratios.

For an Indian Investor, many big financial websites where you can find all the key ratios mentioned above along with other important financial information. For example – Money Control, Yahoo Finance, Economic Time Markets, Screener, Investing[dot]com, Market Mojo, etc.

Further, you can also use our stock market analysis website “Trade Brains Portal“, to find these ratios. Let me show you how to find these key financial ratios on Trade Brains Portal. Let’s say, you want to look into all the above-mentioned financial ratios for “Reliance Industries”. Here’s what you need to do next.

Steps to find Key Ratios on Trade Brains Portal

1) Go to Trade Brains Portal at https://portal.tradebrains.in/ and search for ‘Reliance Industries’.

2) Select the company. This will take you to the “Reliance Industries” stock detail Page.

3) Scroll down to ‘5 Year Analysis & Factsheet’ and here you can find all the financial ratios for the last five years.

You can find all the key financial ratio analysis discussed in this article on this section of stock details. In addition, you can also look into other popular financial ratios like Profitability ratio, Efficiency ratio, Valuation ratio, Liquidity ratio, and more.

Conclusion

In this article, we discussed the list of Must Know Financial Ratio Analysis for stock market investors. Now, let us give you a quick summary of all the key financial ratios mentioned in the post.

8 Financial Ratio Analysis that Every Stock Investor Should Know:

Earnings Per Share (EPS) – Increasing for last 5 years
Price to Earnings Ratio (P/E) – Low compared to companies in the same sector
Price to Book Ratio (P/B) – Low compared to companies in the same sector
Debt to Equity Ratio – Should be less than 1
Return on Equity (ROE) – Should be greater than 20%
Price to Sales Ratio (P/S) – Smaller ratio (less than 1) is preferred
Current Ratio – Should be greater than 1
Dividend Yield – Consistent/ Increasing yield preferred

In addition, here is a checklist (that you should download), which can help you to select a fundamentally strong company based on the financial ratios. Also, feel free to share this image with those whom you think can get benefit from the checklist.

That’s all for this post. Hope this article on ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ was useful for you. If you have any doubt or need any further clarification, feel free to comment below. We will be happy to help you. Take care and happy investing.

Kritesh Abhishek

Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

www.linkedin.com/in/kriteshrules/

October 19, 2020 Kritesh Abhishek Investment Basics, Valuations 32 comments

#19 Most Important Financial Ratios for Investors!

List of most important Financial ratios for investors: Reading the financial reports of a company can be a very tedious job. The annual reports of many of the companies are over hundreds of pages which consist of a number of financial jargon. Moreover, if you do not understand what these terms mean, you won’t be able to read the reports efficiently. Nevertheless, there are a number of financial ratios that have made the life of investors very simple. Now, you do not need to make a number of calculations and you can just use these financial ratios to understand the gist.

In this post, I’m going to explain the 19 most important financial ratios for investors. We will cover different types of ratios like valuation ratios, profitability ratios, liquidity ratios, efficiency ratios, and debt ratios.

Please note that you do not need to mug up all these ratios or formulas. You can easily find all these ratios of any public company in India on our stock research portal here. Just understand them and learn how & where they are used. These financial ratios are created to make your life easier, not tough. Let’s get started.

19 Most Important Financial ratios for Investors

A) Valuation Ratios

These ratios are also called Price ratios and are used to find whether the share price is over-valued, under-valued, or reasonably valued. Valuation ratios are relative and are generally more helpful in comparing the companies in the same sector (apple to apple comparison). For example, these ratios won’t be of that much use if you compare the valuation ratio of a company in the automobile industry with another company in the banking sector.

Here are a few of the most important Financial ratios for investors to validate a company’s valuation.

1. Price to Earnings (PE) ratio

The price to earnings ratio is one of the most widely used ratios by investors throughout the world. PE ratio is calculated by:

P/E ratio = (Market Price per share/ Earnings per share)

A company with a lower PE ratio is considered under-valued compared to another company in the same sector with a higher PE ratio. The average PE ratio value varies from industry to industry.

For example, the industry PE of Oil and refineries is around 10-12. On the other hand, the PE ratio of FMCG & personal cared is around 55-50. Therefore, you cannot compare the PE of a company from the Oil sector with another company from the FMCG sector. In such a scenario, you will always find oil companies undervalued compared to FMCG companies. However, you can compare the PE of one FMCG company with another company in the same industry, to find out which one is cheaper.

2. Price to Book Value (P/BV) ratio

The book value is referred to as the net asset value of a company. It is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. The Price to book value (P/B) ratio can be calculated using this formula:

P/B ratio = (Market price per share/ book value per share)

Here, you can find book value per share by dividing the book value by the number of outstanding shares. As a thumb rule, a company with a lower P/B ratio is undervalued compared to the companies with a higher P/B ratio. However, this ratio also varies from industry to industry.

3. PEG ratio

PEG ratio or Price/Earnings to growth ratio is used to find the value of a stock by taking into consideration the company’s earnings growth. This ratio is considered to be more useful than the PE ratio as the PE ratio completely ignores the company’s growth rate. PEG ratio can be calculated using this formula:

PEG ratio = (PE ratio/ Projected annual growth in earnings)

A company with PEG < 1 is good for investment.

Stocks with a PEG ratio of less than 1 are considered undervalued relative to their EPS growth rates, whereas those with ratios of more than 1 are considered overvalued.

4. EV/EBITDA

This is a turnover valuation ratio. EV/EBITDA is a good valuation tool for companies with lots of debts. This ratio can be calculated by dividing enterprise value (EV) of a company by its EBITDA. Here,

EV = (Market capitalization + debt – Cash)
EBITDA = Earnings before interest tax depreciation amortization

A company with a lower EV/EBITDA value ratio means that the price is reasonable.

5. Price to Sales (P/S) ratio

The stock’s Price to sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. It can be calculated using the formula:

P/S ratio = (Price per share/ Annual sales per share)

Price to sales ratio can be used to compare companies in the same industry. Lower P/S ratio means that the company is undervalued.

6. Dividend yield

Dividends are the profits that the company shares with its shareholders as decided by the board of directors. Dividend yield can be calculated as:

Dividend yield = (Dividend per share/ price per share)

Now, how much dividend yield is good? It depends on the investor’s preference. A growing company may not give a good dividend as it uses that profit for its expansion. However, capital appreciation in a growing company can be large. On the other hand, well established large companies give a good dividend. But their growth rate is saturated. Therefore, it depends totally on investors whether they want a high yield stock or growing stock.

As a rule of thumb, a consistent and increasing dividend yield over the past few years should be preferred.

7. Dividend Payout

Companies do not distribute its entire profit to its shareholders. It may keep a few portions of the profit for its expansion or to carry out new plans and share the rest with its stockholders. Dividend payout tells you the percentage of the profit distributed as dividends. It can be calculated as:

Dividend payout = (Dividend/ net income)

For an investor, a steady dividend payout is favorable. However, a very high dividend payout like 80-90% maybe a little dangerous. Dividend/Income investors should be more careful to look into the dividend payout ratio before investing in dividend stocks.

B) Profitability ratio

Profitability ratios are used to measure the effectiveness of a company to generate profits from its business. A few of the most important financial ratios for investors to validate the company’s profitability ratios are ROA, ROE, EPS, Profit margin & ROCE as discussed below.

8. Return on assets (ROA)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. It can be calculated as:

ROA = (Net income/ Average total assets)

A company with a higher ROA is better for investment as it means that the company’s management is efficient in using its assets to generate earnings. Always select companies with high ROA to invest in.

9. Earnings per share (EPS)

EPS is the annual earnings of a company expressed per common share value. It is calculated using the formula

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

As a rule of thumb, companies with increasing earnings per share for the last couple of years can be considered as a healthy sign.

10. Return on equity (ROE)

ROE is the amount of net income returned as a percentage of shareholders’ equity. It can be calculated as:

ROE= (Net income/ average stockholder equity)

It shows how good is the company in rewarding its shareholders. A higher ROE means that the company generates a higher profit from the money that the shareholders have invested. Always invest in companies with an average ROE for last three years greater than 15%.

11. Net Profit Margin (NPM)

Increased revenue doesn’t always mean increased profits. The profit margin reveals how good a company is at converting revenue into profits available for shareholders. It can be calculated as:

Profit margin = (Net income/sales)

A company with a steady and increasing profit margin is suitable for investment.

12. Return on capital employed (ROCE)

ROCE measures the company’s profit and efficiency in terms of the capital it employs. It can be calculated as

ROCE= (EBIT/Capital Employed)

Where EBIT = Earnings before interest and tax. And further, Capital employed is the total number of capital that a company utilizes in order to generate profit. It can be calculated as the sum of the shareholder’s equity and debt liabilities. As a rule of thumb, invest in companies with higher ROCE compared to their competitors.

Also read: #27 Key terms in share market that you should know

C) Liquidity ratio

Liquidity ratios are used to check the company’s capability to meet its short-term obligations (like debts, borrowings, etc). A company with low liquidity cannot meet its short-term debts and may face difficulties to run it’s business efficiently. Here are a few of the most important financial ratios for investors to check the company’s liquidity:

13. Current Ratio

It tells you the ability of a company to pay its short-term liabilities with short-term assets. The current ratio can be calculated as:

Current ratio = (Current assets / current liabilities)

While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than the current liabilities of a company.

14. Quick ratio

It is also called an acid test ratio. The quick ratio takes accounts of the assets that can pay the debt for the short term.

Quick ratio = (Current assets – Inventory) / Current liabilities

The quick ratio doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities. A company with a quick ratio greater than one means that it can meet its short-term debts and hence quick ratio greater than 1 should be preferred.

D) Efficiency ratio

Efficiency ratios are used to study a company’s efficiency to employ resources invested in its fixed and capital assets. Here are three of the most important financial ratios for investors to check the company’s efficiency:

15. Asset Turnover Ratio

It tells how good a company is at using its assets to generate revenue. Asset turnover ratio can be calculated as:

Asset turnover ratio = (Sales/ Average total assets)

The higher the asset turnover ratio, the better it’s for the company as it means that the company is generating more revenue per rupee spent.

16. Inventory Turnover Ratio

This ratio is used for those industries which use inventories like the automobile, FMCG, etc. A company should not collect piles of shares and should sell its inventories as early as possible. The inventory turnover ratio helps to check the efficiency of cycling inventory. It can be calculated as:

Inventory turnover ratio = (Costs of goods sold/ Average inventory)

The inventory turnover ratio tells how good a company is at replenishing its inventories.

17. Average collection period:

The average collection period is used to check how long the company takes to collect the payment owed by its receivables. It is calculated by dividing the average balance of account receivable by total net credit sales and multiplying the quotient by the total number of days in the period.

Average collection period = (AR * Days)/ Credit sales

Here, AR = Average amount of accounts receivable
Credit sales= Total amount of net credit sales in the period

The average collection period should be lower as a higher ratio means that the company is taking too long to collect the receivables and hence is unfavorable for the operations of the company.

Also read: 10 Must Read Books For Stock Market Investors.

E) Debt Ratio

Debt or solvency or leverage ratios are used to determine a company’s ability to meet its long-term liabilities. They are used to calculate how much debt a company has in its current financial situation. Here are the two most important Financial ratios for investors to check debt:

18. Debt/equity ratio

It is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company.

As a thumb rule, invest in companies with debt to equity ratio less than 1 as it means that the debts are less than the equity.

19. Interest coverage ratio

It is used to check how well the company can meet its interest payment obligation. Interest coverage ratio can be calculated by:

Interest coverage ratio = (EBIT/ Interest expense)

Where EBIT = Earnings before interest and taxes

The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. A higher interest coverage ratio is preferable for a company as it reflects- debt serving ability of the company, on-time repayment capability, and credit rating for new borrowings

Always invest in a company with a high and stable Interest coverage ratio. As a thumb rule, avoid investing in companies with an interest coverage ratio less than 1, as it may be a sign of trouble and might mean that the company has not enough funds to pay its interests.

Closing Things

In this article, we discussed the list of most important Financial ratios for investors. If you want to look into these financial ratios for any publically listed company on Indian stock exchanges, you can go to our stock research portal. Here, you can find the five year analysis and factsheet of all these ratios.

That’s all for this post. I hope this article on the most important Financial ratios for investors is useful to the readers. In case I missed any important financial ratio, feel free to comment below. Happy Investing.

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

September 29, 2020 Kritesh Abhishek Investment Basics, Valuations 13 comments

Fundamentals of stock market- key financial ratios

The Fundamentals of Stock Market- Must Know Terms

Here are the few key financial terms that a stock market investor must know. Although the list is long, it will be worth to know these terms to get a good grasp on the fundamentals. Here it goes:

Promoter’s shares: – The company shares that are owned by the promoters i.e. the owners of the company is called Promoters shares. The public cannot own these shares.

Outstanding shares: The company’s shares that are owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Public (retail investors), foreign institutional investors (FII), Domestic institutional investors (DII), mutual funds etc. can own outstanding shares.

Market Capitalization: – Market Cap or Market capitalization refers to the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures. In general, market capitalization is the market value of company outstanding shares.

Market Capitalization = No of outstanding shares * share value of each stock

Book value: – It is the ratio of total value of company assets to the no of shares. In general, this is the value which the shareholders will get if the company is liquidated. Hence, it is always preferred to buy a stock with high book value compared to the current share price.

Book Value = [Total assets – Intangible assets (patents, goodwill..) – liabilities]

Earnings Per Share (EPS): This is one of the key ratios and is really important to understand before we study other ratios. EPS is the profit that a company has made over the last year divided by how many shares are on the market. Preferred shares are not included while calculating EPS. In general, Money earned per outstanding shares.

Earnings Per Share (EPS) = (Net income – dividends from preferred stock)/(Total outstanding shares)

From the perspective of an investor, it is always better to invest in a company with higher EPS as it means that the company is generating greater profits.

Price to Earnings Ratio (P/E): The Price to Earnings ratio is one of the most widely used financial ratio analysis among the investors for a very long time. A high P/E ratio generally shows that the investor is paying more for the share. As a thumb rule, a low P/E ratio is preferred while buying a stock, but the definition of ‘low’ varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have different P/E ratios for the companies in their sector, and comparing the P/E ratio of the company of one sector with P/E ratio of the company of another sector will be insignificant. However, you can use the P/E ratio to compare the companies in the same sector, preferring one with low P/E. The P/E ratio is calculated using this formula:

Price to Earnings Ratio= (Price Per Share) / ( Earnings Per Share)

It’s easier to find the find the price of the share as you can find it from the current closing stock price. For the earning per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS (Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past 12 month’s performance of the company.

If you want to read further in details, I will recommend you to read this book: Everything You Wanted to Know About Stock Market Investing -Best selling book for stock market beginners.

Price to Book Ratio (P/B): Price to Book Ratio (P/B) is calculated by dividing the current price of the stock by the latest quarter’s book value per share. P/B ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower P/B ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.

Price to Book Ratio = (Price per Share)/( Book Value per Share)

Dividend yield: – It is the portion of the company earnings decided by the company to distribute to the shareholders. A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. It can be distributed quarterly or annually basis and they can issue in the form of cash or stocks.

Dividend Yield = (Dividend per Share) / (Price per Share)*100

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor whether he wants to invest in a high or a low dividend yielding company.

Also Read: 4 Must Know Dates for a Dividend Stock Investor

Market lot: – It is the minimum no of shares required to purchase or sell to carry a transaction.

Face value: – It is the price of the stock written in the company’s books when issued during IPO. It is the amount of money that the holder of a debt instrument receives back from the issuer on the debt instrument’s maturity date. Face value is also referred to as par value or principal.

Dividend % – This is the ratio of the dividend given by the company to the face value of the share.

Basic EPS: – This is nothing but Earnings per share.

Diluted EPS: – If all the convertible securities such as convertible preferred shares, convertible debentures, stock options, bonds etc. are converted into outstanding shares then the Earnings per share is called Diluted earnings per share. The less the difference between Basic and diluted EPS the more the company is preferable.

Cash EPS: – This is the ratio of cash generated by the company per diluted outstanding share. If Cash EPS is more the more the company is preferred.

Cash EPS = Cash flows / no of diluted outstanding shares

PBDIT: Profit before depreciation, interest, and taxes.

PBIT: – Profit before interest and taxes

PBT: – Profit before taxes

PBDIT margin: – It is the ratio of PBDIT to the revenue.

Net profit margin: – It is the ratio of Net profit to the revenue.

Assets: – Asset is an economic value that a company controls with an expectation that it will provide future benefit.

Liability: It is an obligation that the company has to pay in future due to its past actions like borrowing money in terms of loans for business expansion purpose.

Assets = Liabilities + Shareholders equity

Asset turnover ratio: – It is calculated by dividing revenue to the total assets

Debt to Equity Ratio: The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier A lower debt-to-equity number means that a company is using less leverage and has a stronger equity position.

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Return on Equity (ROE): Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders has invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.

Return on Equity = (Net Income)/(Average Stockholder Equity)

Price to Sales Ratio (P/S): The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.

Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

Current Ratio: Current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. It is a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable

Current Ratio = (Current Assets)/(Current Liabilities)

Quick ratio: The name itself tells quick means how well the company can meet its short-term financial liabilities. The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

Note: This content is published by a guest author- Anjani Badam.

April 26, 2017 Anjani Badam Investment Basics 9 comments

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