Top 5 financial ratios that can help you make smarter investment decisions
In the article, we will explore how these ratios can help investors value stocks, and assess a company's financial health, profitability, and efficiency.
Investing in stocks can be a great way to grow your wealth over time. However, it's important to do your analysis and research before you invest in any company. One of the best ways to assess a company's financial health is to look at its financial ratios. Financial ratios are mathematical calculations that compare different financial metrics of a company. They can be used to assess a company's profitability, efficiency, leverage, and valuation.
Here are five financial ratios or metrics to check before investing in a company:
1. Price-to-earnings ratio (P/E ratio)
The price-to-earnings ratio (P/E ratio) is a stock valuation metric that compares a company's current share price to its earnings per share (EPS). A high P/E ratio can indicate that a company is overvalued, while a low P/E ratio can indicate that a company is undervalued.
2. Price-to-sales ratio (P/S ratio)
The P/S ratio compares a company's current share price to its sales per share (SPS). A high P/S ratio can indicate that a company is overvalued, while a low P/S ratio can indicate that a company is undervalued.
3. Debt-to-equity ratio (D/E ratio)
The D/E ratio compares a company's total debt to its total equity. A high D/E ratio can indicate that a company is highly leveraged and therefore riskier. A low D/E ratio can indicate that a company is less leveraged and therefore less risky. Normally it should be less than one.
4. Return on equity (ROE)
The ROE is a measure of a company's profitability. It compares a company's net income to its average shareholder's equity. A high ROE can indicate that a company uses its shareholder's equity efficiently. A low ROE can indicate that a company is not using its shareholder's equity efficiently.
5. Gross margin
The gross margin is a measure of a company's profitability. It compares a company's gross profit to its net sales. A high gross margin can indicate that a company is able to generate a lot of profit from its sales. A low gross margin can indicate that a company cannot generate a lot of profit from its sales.
It's important to note that no single ratio or metric can tell you everything you need to know about a company. You should always consider multiple ratios and metrics when evaluating a company's financial health. As an investor, one should also read the company's annual report, quarterly reports and concall to make informed decisions while investing.
Disclaimer: The article is for informational purposes only and not investment advice.