Stock Analysis

How Many Ratios and Which Do You Use in the Stock Analysis?

Stock analysis is an important aspect of the investment process.

It helps you to gain insights into how a company is performing and how it might perform in the future.

Stock analysis involves comparing the company’s fundamentals with its competitors’ and other relevant factors to determine whether an investment would be profitable or not.

1. Price to Earnings Ratio (PE)

The PE ratio is the most commonly used and most important stock valuation metric. It helps to measure how much investors are willing to pay for one dollar of a company’s earnings or profit. The formula is fairly simple:

Price/Earnings (PE) = Price per share / Earnings per share

The PE ratio is easy to calculate and understand, but it does have its limitations.

Therefore, it is often used in conjunction with other ratios when analyzing stocks.

2. Price to Book Value Ratio (PB)

The price-to-book value ratio (PB) is the ratio of a company’s market value to its book value. Book Value is the net worth of a company as per its balance sheet.

This ratio indicates how much investors are willing to pay for each dollar of a company’s book value.

The formula for calculating this is:

$$\text{Book Value}/ \text{Market Capitalization}$$

3. Price to Cash Flow Ratio (P/CF)

A price-to-cash flow ratio (P/CF) is a measure of the market value of a company relative to its operating cash flows.

The higher the P/CF, the lower its value as compared to cash flows. This metric can be used in determining whether a stock is undervalued or overvalued.

The formula for calculating Price to Cash Flow Ratio (P/CF) is:

Price / Cash Flows From Operations

4. Dividend Yield (DY)

Dividend Yield (DY) is the ratio of the dividend to the stock price. It is also known as dividend yield.

It is a measure of return on investment in a stock. It compares the returns on stocks and bonds.

A high dividend yield means you are getting paid to wait for your stock to appreciate in value, while higher capital gains may be possible if you choose not to wait.

5. Return on Equity (ROE)

Return on equity (ROE) is a financial ratio that measures the profitability of a firm’s common stock investment. It indicates how well management is using the company’s invested capital to generate shareholder value.

ROE is calculated by dividing the net profit after tax by the average common equity for that period:

ROE = \frac{\text{net profits}}{\text{average common equity}}.

6. Return on Assets (ROA)

Return on Assets (ROA) is a measure of how profitable a company is relative to its total assets.

It is calculated as net income divided by total assets, with the formula ROA = Net Income / Total Assets. The higher the return on assets, the better.

It can be used to determine how efficiently management is utilizing the company’s assets and how much profit it generates from each dollar of assets within its control.

7. Price to Sales Ratio (PS)

The price-to-sales ratio is a measure of the price of a company’s stock relative to its sales.

The higher the PS, the more expensive the stock. The lower the PS, the cheaper the stock.

8. Market Capitalization to Earnings Before Interest and Taxes (EBIT)

Market capitalization to EBIT ratio is a measure of how much investors are willing to pay for a company’s earnings.

A higher ratio indicates that investors are paying more for a company’s earnings, which could indicate that they expect higher future earnings or that the company is less likely to default on its debt obligations.

This can be used as an indicator of whether a stock is over- or undervalued relative to its peers and industry average.

The formula for this ratio is: market cap/EBIT = Mkt Cap/EBIT

9. Market Capitalization to Sales Ratio (MS)

Market Capitalization to Sales Ratio (MS) is a popular measure of the market value of a stock.

It estimates how much money investors are willing to pay for every dollar of sales.

The formula is:

Market Cap / Sales Revenue = MS

10. Net Profit Margin

The net profit margin is the ratio of net income to revenue.

Net income is the difference between revenue and costs.

It is also called operating income, which means that it represents the profit/loss a company has made by selling its products or services during a period of time (usually a year).

The calculation formula of Net Profit Margin:

Net Profit Margin = [Net Income] / [Sales Revenue]

Bottom Line

So, there you have it: ten ratios and one takeaway.

A lot of these ratios are used in stock analysis, but the most important thing is to understand why they’re used and what they mean for your company.

We recommend using the PE ratio as a starting point, because it gives a quick snapshot of how expensive or cheap your stock is relative to its earnings growth potential over time (it also helps determine whether or not investors will pay more for one stock over another).

If this doesn’t seem useful enough on its own then try looking at some other metrics too!


You may also like

Leave a reply

Your email address will not be published. Required fields are marked *