Financial Ratios That Every Investor Must Know!
To invest in a stock, one has to make an in-depth analysis of company’s financial data as it projects the performance of the company, its future growth over the years and its worth in the market. Viewing the entire financial statements of a company may be time-consuming. Instead to save time investors can calculate the financial ratios from the financial statements of a company to understand its performance.
With the robust growth of technology, where we have the automated trading robot for executing the trade better, we also have software for calculating the financial ratio of a company. Investors can feed in the required details and derive the results using the software. Below are the financial ratios that every investor must analyze and examine before investing in the stocks.
1) Price-Earnings ratio
Price to Earnings ratio is calculated by analyzing a company’s price per share to the earnings. This ratio decides how much stock investors pay for each rupee of earnings. While it is good to have a high P/E ratio but it may also indicate that the stock is overpriced in the market. A lower P/E ratio doesn’t mean that the company is not performing well. A stock with lower P/E may have a greater market growth in the future. It is ideal to compare the past P/E ratio with the current P/E ratio of a company to know the growth progression as the company may boost its P/E ratio merely by increasing its debts.
2) Price-Earnings-Growth ratio:
In short, called the PEG ratio, helps the investors to identify the growth perspective of a company. While P/E ratio determines the price that an investor is willing to pay for every penny in earnings that a company generates, PEG ratio goes a step ahead. It determines the relationship between the price of a stock, earnings per share and the growth of a company. This is calculated by dividing the P/E ratio to the growth rate.
3) Debt-Equity ratio:
This ratio determines the leveraging capacity of a company. It explains the involvement of debt in a company against its equity. Lower the ratio, better the investment as it indicates the scope of expansion for a company.
4) Price-Book value ratio:
Book value refers to the amount that remains in the company after paying off its liability. This ratio is calculated to compare the company’s market price to the book value. The stock is said to be undervalued if the ratio is less than one as the value of the assets is more than the market value.
5) Return on equity:
This is one of the important ratios that every investor looks for. Yes, this ratio measures the return that investor gets from the business. This is calculated by dividing the net income to the shareholder’s equity. This ratio must be analyzed by every investor to compare the investment benefits from other industries. It is preferable to invest in the stock if ROE is between 15-20%.