19 Most Important Financial Ratios for Investors

#19 Most Important Financial Ratios for Investors

#19 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 company are over 100 pages which consist of a number of financial jargons.

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 has 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 19 most important financial ratios for the 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 always google these terms anytime (or when you need). 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:

Valuation Ratios

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. For example, these ratios won’t be of that much use if you compare the valuation ratio of a company in an automobile industry with another company in the banking sector. Here are few of the most important Financial ratios for investors to validate a company’s valuation.

1. P/E ratio: 

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

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

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, PE ratio of FMCG & personal cared is around 55-50. Therefore, you cannot compare the PE of a company from Oil sector with another company from FMCG sector. In such scenario, you will always find oil companies undervalued compared to FMCG companies.

A company with lower PE ratio is considered under-valued compared to another company in the same sector with higher PE ratio.

2. P/B ratio:

The book value is referred as the net asset value of a company. It is calculated as total assets minus intangible assets (patents, goodwill) and liabilities.

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 lower P/B ratio is undervalued compared to the companies with 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 in consideration company’s earnings growth.

This ratio is considered to be more useful than PE ratio as 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 PEG ratio 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.

Here,  EV = (Market capitalization + debt – Cash)

EBITDA = Earnings before interest tax depreciation amortization

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

5. P/S ratio:

The stock’s price/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)

P/S 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, what dividend yield is good?

It depends on the investor’s preference. A growing company may not give good dividend as it uses that profit for its expansion. However, the 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 over past few years should be preferred.

7. Dividend payout:

Companies do not distribute its entire profit to its shareholders. It may keep few portion 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 dividend. It can be calculated as:

Dividend payout = (Dividend/ net income)

For an investor, steady dividend payout is favorable. Moreover, dividend/Income investors should be more careful to look into dividend payout ratio before investing in dividend stocks.

Also read: Where should I invest my money?

Profitability ratio

liquidity ratio

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

1. 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 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.

2. 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 year can be considered as a healthy sign.

3. 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 high ROE.

4. Net Profit margin

Increased revenue doesn’t always mean increased profits. 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 steady and increasing profit margin is suitable for investment.

5. Return on capital employed (ROCE)

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

ROCE= (EBIT/Capital Employed)

Where EBIT = Earnings before interest and tax

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 shareholder’s equity and debt liabilities.

As a rule of thumb, invest in companies with higher ROCE.

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

Liquidity ratio

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 few of the most important financial ratios for investors to check the company’s liquidity:

1. Current Ratio:

It tells you the ability of a company to pay its short-term liabilities with short-term assets. 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 current liabilities of a company.

2. Quick ratio:

It is also called as acid test ratio. 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 the quick ratio greater that one means that it can meet its short-term debts and hence quick ratio greater than 1 should be preferred.

Efficiency ratio

Efficiency ratios

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:

1.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)

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

2. 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. 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)

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

3. Average collection period:

Average collection period is used to check how long 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

Where AR = Average amount of accounts receivable

Credit sales= Total amount of net credit sales in the period

Average collection period should be lower as 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.

Debt Ratio

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 at its current financial situation. Here are the two most important Financial ratios for investors to check debt:

1. 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.

2. 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 high and stable Interest coverage ratio. As a thumb rule, avoid investing in companies with 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.

If you are new to stock market and want to learn to select good stocks for investing, here is an amazing online course on HOW TO PICK WINNING STOCKS for beginners. Check it out now.

That’s all. I hope this post 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.

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December 29, 2017 Investment Basics, Valuations 10 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)

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.

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 Investment Basics 9 comments
8 Financial Ratio Analysis that Every Stock Investor Should Know cover

8 Financial Ratio Analysis that Every Stock Investor Should Know

8 Financial Ratio Analysis that Every Stock Investor Should Know. The valuation of a company is a very tedious job. It’s not easy to evaluate the true worth of a company as the process takes the reading of company’s several years’ financial statements like balance sheet, profit and loss statements, cash-flow statement, Income statement etc.

Although it really tough to go through all these information, however, there are various financial ratios available which can make the life of a stock investor really simple. Using these ratios they can choose right companies to invest in or to compare the financials of two companies to find out which one is better.

This post about ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ is divided into two parts. In the first part, I will give you the definitions and examples of these 8 financial ratios. In the second part, after financial ratio analysis, I will tell you how and where to find these ratios. So, be with me for the next 8-10 minutes to enhance your financial knowledge.

So, let’s start the first part of this post with the financial ratio analysis.

If you are a beginner and want to learn stock market, I will highly recommend you to read this book first: Everything You Wanted to Know About Stock Market Investing

Quick note: You don’t need to worry about how to calculate these ratios or remember the formulas by-heart, as it will be already given in the financial websites. However, I will recommend you to go through this financial ratio analysis as it’s always beneficial to have good financial knowledge.

financial ratio analysis trade brains

Financial Ratio Analysis that Every Stock Investor Should Know:

  1. Earnings Per Share (EPS):

    This is one of the key ratios and is really important to understand Earnings per share (EPS) before we study other ratios. EPS is basically 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.

    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 EPS as it means that the company is generating greater profits. Also, before investing in a company, you should check it’s EPS for the last 5 years. If the EPS is growing for these years, it’s a good sign and if the EPS is regularly falling or is erratic, then you should start searching another company.

  2. 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 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 at 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.

  3. 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)

  4. 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)

    As a thumb of rule, companies with a debt-to-equity ratio more than 1 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 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)

    As a thumb rule, always invest in a company with ROE greater than 20% for at least last 3 years. A yearly increase 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. 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)

    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.

    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

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. 

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

For an Indian Investor, you these are 3 big financial websites where you can find all the key ratios mentioned above along with other important financial information:

I, generally use money control to find the key financial ratio analysis. The mobile app for Money control is also very efficient and friendly and I will recommend you to use the mobile app.

Now, let me show you how to find these key ratios in Money Control. Let’s take a company, Say ‘Tata Motors’. Now, we will dig deep to find all the above-mentioned rations.

Financial ratio analysis -Steps to find the Key Ratios in Money Control:

  • Open http://www.moneycontrol.com/ and search for ‘Tata Motors’.
    financial ratio analysis 3
  • This will take you to the Tata Motor’s stock quote page.
    Scroll down to find the P/E, P/B, and Dividend Yield.
    financial ratio analysis 4financial ratio analysis 2
  • Now go to the ‘Financials’ tab and select ‘Ratio’ option [i.e. Financial  Ratio]
    Scroll down to find all the remaining financial ratios.
    financial ratio analysis 5

That’s all! These are the steps to do the key financial ratio analysis. Now, let me give you a quick summary of all the key financial ratios mentioned in the post.

Summary:

8 Financial Ratio Analysis that Every Stock Investor Should Know:

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

Feel free to share this image with ones whom you think can get benefit from the checklist.

5 simple financial ratios for stock picking

I hope this post on ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ is useful for the readers. If you have any doubt or need any further clarification, feel free to comment below. I will be happy to help you.

April 17, 2017 Investment Basics, Valuations 28 comments