Financial Ratios of a Company for Stock Selection Decision

Financial Ratios of a Company for Stock Selection Decision.

ANALYZING CURRENT PROFITABILITY AND RISK THROUGH FINANCIAL RATIOS.

Financial Ratios Analysis. 10 important ratios for Financial Analysis of a company.

1. PEG Ratio. Meaning: PEG is more reliable ratio than the PE as it considers the growth rate. It determines stock value in relation to its earnings growth (year to year) bases. It is considered to be an indicator of a stocks true value as growth rate plays a crucial factor in valuing a company for long term investments. It considers the past records as well the future expectations while valuing a company..

2. Price To Book Ratio. Meaning: The Price to Book value ratio indicates the price that the market is giving to acquire the stock in relation to its Book value (value of an asset according to its balance sheet account balance).

3. Debt To Equity Ratio. The Debt to Equity is a major valuation Ratio, it compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. It is in what propotion of debt the company is using in relation to its Equity.

4. Return on Equity. Meaning: The return on equity is one of the major ratios to value the company it measures how good the company is in generating returns on the investment it received from its shareholders..

5. Return on Capital Employed. Meaning: ROCE measures the company’s Profitability in terms of its capital employed that means what returns is the business able to generate on the capital that is invested in the business despite of other expenses and taxes i.e it shows how much a company earns from its operations alone.

6. Enterprise Value to EBITDA. Meaning: The EV/EBITDA Ratio defines the value of the company in relation to its earnings before taxes, depreciation and amortization. It indicates the company’s value with respect to debt and other labilities included which assist s=the investors to determine true value of the business considering its obligations and other factors..

7. Price to Sales. The P/S ratio shows how much investors are willing to pay per Rupee of sales for a stock i.e. if the P/S is 2 that means the investors are willing to pay twice the amount of sale a company is generating. The lower the price-to-sales the more attractive the investment This ratio can be effective in valuing growth stocks that have suffered a temporary setback.

8. Price To Net Operating Revenue. Meaning : The Price/ Net operating ratio determines the price of the company over its net operating profit ( total sales minus total expenses). It determines the number of times that the market is paying to acquire the share over its net operating profit..

9. Asset Turnover Ratio. Meaning : The asset turnover ratio is the ratio between the value of a company's sales or revenues and the value of its assets. It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue..

10. Cash Return on Invested Capital. Meaning: This ratio indicates how well management utilizes the cash that isn’t part of the business. It’s a great way to measure the skills of the managers. It compares a company's cash return to its equity..

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