A summary of financial ratios
Every level of investor aims to achieve the highest possible return for holding many securities. Therefore, before investing, it is suggested to understand the importance of financial analysis including financial ratio analysis and stock ratio analysis. If you are curious to know more about stock market ratios, this article is for you.
Importance of Financial Ratios
There are two types of factors that affect the business operations of the company; either the external or the internal ones. The investor should keep both the factors in his mind while making an investment decision. Despite knowing there are numerous factors, the investor finds financial ratio analysis quite helpful to take better decisions.
Following are the list of financial ratios that can assist you to drive the fair value of the stock;
It is calculated by dividing market value per share by earnings per share. As an investor, you should buy the stock when it's P/E ratio is lowest.
For this stock ratio, the market value per share is divided by the operating cash flow of the company. It is better to buy stocks when the P/CF ratio is the lowest.
It is calculated by dividing the market value per share by net sales of the company. It is suggested to buy the stocks when this stock ratio is lowest.
This financial ratio is calculated by dividing net income by net sales. When the company has a high net profit margin, it is better to invest in its stocks.
It is calculated by dividing net profit by total investment. The investor should buy the stocks of the company that has a high return on investment.
This ratio is calculated by dividing net income by shareholder’s equity. This ratio reflects how much an investor can earn by investing each dollar in the company. So, it is best to buy the stocks when ROE is slightly higher and there is a chance of a further increase in the future.
It indicates the profitability of the company. You can calculate it by dividing net profit by outstanding common stock shares of the company. It is recommended to invest in a company that has higher EPS.
Apart from these financial ratios, investors use sales growth rate, current ratio, quick ratio, debt to equity ratio, book value, price to book value ratio, and book value per share, etc. In a nutshell, the financial ratio analysis allows the investor to know more about the stock market and the company’s performance.
A summary of financial ratios
|Indicator||Best time to buy||Within the industry, comparison to select the best stock|
|Price to Earnings Ratio (PE Ratio)||Lower the better||Lower than the industry average|
|Price to Cash Flow Ratio (P/CF Ratio)||Lower the better||Lower than the industry average|
|Price to Sales Ratio (P/S Ratio)||Lower the better||Lower than the industry average|
|Net Profit Margin||Higher the better||Higher than the industry average|
|Return on Investment (ROI)||Higher the better||Higher than the industry average|
|Return on equity (ROE)||Slightly higher||Equal or slightly higher than the industry average|
|Earnings per share (EPS)||Higher the better||Higher than the industry average|
|Sales Growth Rate||Higher the better||Higher than the industry average|
|Current Ratio||Slightly higher||Equal or slightly higher than the industry average|
|Quick Ratio||Near to 1|
|Total Debt to Equity Ratio||Lower the better||Lower than the industry average|
|Book Value||Higher the better||Cannot use to campare companies|
|Book value per share (BVPS)||Stocks with lower share price than the BVPS||Higher than the industry average|
|Price to book value ratio||Less than 1||Lower the better|
Books to learn more about financial ratios
Where to find the latest financial ratio values?
Previously, it was arduous to collect the data, but now, the internet has made it possible to easily access the data and compare the performance of different markets and securities. Some of the best websites to find the latest financial ratio values are Investing.com, Yahoo Finance, and Google finance, etc. All sites provide real-time data, financial news, charts, quotes, financial tools, and analysis.
The financial ratio analysis helps to evaluate the economic status of the companies. Eventually, the change in economical conditions affects the stock prices of the companies.