Investing in stocks can be a challenging task, especially for beginners. With so much information available, it can be overwhelming to determine which stocks to buy and which ones to avoid. Here are 5 financial ratios to quickly analyse stocks. It is an effective tool that can help investors make informed decisions when analyzing stocks.
These ratios provide insight into a company’s financial health, growth potential, and profitability, allowing investors to assess its investment potential.
In this article, we will explore the different types of financial ratios and how they can be used to analyze stocks, providing you with a quick and efficient way to evaluate investment opportunities.
Read: 3 Types Of Stocks That Every Investor And Trader Must Know
1. Earnings Per Share (EPS)
EPS is one of the financial ratios to quickly analyse stocks. According to Investopedia, earnings per share (EPS) is a company’s net profit divided by the number of common shares it has outstanding.
Source: educba
Company’s EPS vary based on changes in earnings, total number of outstanding shares, or both. A company can increase its EPS by increasing its earnings or reducing its number of shares through share buybacks.
Typically, company with high EPS are considered as a profitable company. Usually, we can find EPS value in a company’s income statement.
Read: As An Investor, Here Are 3 Things To Look For In Financial Statements
2. Price To Earnings Ratio (P/E)
P/E ratio is one of the financial ratios to quickly analyse stocks. PE ratio measures the relationship between a company’s stock price and its earnings per issued share. Sometimes it is also known as the earnings multiple.
Since the P/E ratio relates to the share price and earnings per share, some investors prefer stocks with lower P/E. However, a high PE does not mean the share price is overvalued. A company can have a high P/E because investors expect high future growth and thus buy it from now. This causes the price has started to increase due to high demand.
Tips for you, always compare a company to other in the same industry. Some of you may wonder, what about companies without P/E ratio? Companies that have no earnings or are losing money does not have a P/E ratio.
3. Return On Equity (ROE)
Return on Equity shows how well a company uses shareholders investment funds to generate income. ROE is calculated by comparing the proportion of net income against the amount of shareholder’s equity.
Source: wallstreetmojo
Investors love high ROE stocks because it shows the company is good at converting its equity financing into profits. If you are looking for a strong company with good ROE, a return on equity ratio of 15% – 20% is considered good.
This is why ROE is one of financial ratios to quickly analyse stocks, that is being used by most investors.
Read: 5 Reasons Why We Lose Money In The Stock Market
4. Net Tangible Asset (NTA)
Net tangible asset is one of the financial ratios to quickly analyse stocks. NTA is the value of all tangible assets minus all liabilities in a business.
Some examples of net tangible assets are land, buildings, vehicles, equipment, and etc. There are few significances of NTA such as:
- Have definite value
- Help in production
- Can be sold and thus raise cash
- Subject to depreciation
- Used as collateral / security
Usually, investors will compare current stock price to NTA value. It can help to determine whether a company is undervalued or overvalued. If the current share price is smaller than the NTA value, the stock is considered undervalued and vice versa.
5. Dividend Yield (DY)
Why does investors have to pay attention to dividend yield compared to dividend payout? Dividend yield displayed in percentage represents the annualized return a stock pays out in dividends.
So, what is a good dividend yield? Dividend yield ranging from 5% – 7% are generally considered to be good. Anything above 7% is considered very good.
But remember, other than high dividend yield, consistency in distributing dividend is equally important. You will not want to receive dividend for only one time.
The legendary Warren Buffet focused on dividend investing to get steady cash flow over the long-term. There are few stocks in Buffet’s portfolio that he has been holding for long period. That’s why dividend yield is one of the financial ratios to quickly analyse stocks.
However, investors also must keep in mind that high dividend yield may not attractive if the stock price is declining. What is the point of receiving dividends but you are losing more money from the declining stock price right?
Read: Create Your Stock Watchlist With These Simple Steps
Conclusion
Financial ratios are a powerful tool for investors to analyze stocks and make informed investment decisions. By examining a company’s financial statements and using various ratios, investors can gain valuable insights into a company’s financial health and potential for growth.
While no single ratio can provide a complete picture of a company’s financial health, using a combination of ratios can help investors make more informed decisions about which stocks to invest in. You can start your own fundamental analysis by looking at these 5 financial ratios to quickly analyse stocks.
However, it is important to remember that investing in the stock market carries risks, and no investment strategy can guarantee success. By using financial ratios as part of a larger investment strategy, investors can navigate the complexities of the stock market and work towards achieving their financial goals.
