Top 10 Must-Know Financial Ratios for Share Market Investors
One of the most profitable opportunities in the business sector is investing in the stock market. By using the right tactics, in-depth research, and persistence, it enables people to generate substantial returns on their investments. However, novice investors frequently struggle to make wise investment choices, primarily because they are unfamiliar with financial measures. In order to assess a company’s performance in terms of profitability, liquidity, leverage, and operational effectiveness, financial ratios are crucial. The top ten financial ratios that share market investors absolutely must be aware of are covered in this article.
Price-Earnings Ratio (P/E Ratio): The P/E ratio is probably the most popular financial ratio among investors. It is calculated by dividing the market price per share by the company’s earnings per share (EPS). A higher P/E ratio indicates that the stock is expensive, while a lower ratio indicates that it is undervalued. This ratio helps investors determine the company’s future earnings potential, and the higher the P/E ratio, the more confident the investors are in the company. Check more on Buying Stocks today.
Price to Sales Ratio (P/S Ratio): The P/S ratio helps investors determine the amount they are willing to pay for each dollar of revenue of the company. It is calculated by dividing the stock market capitalization of the company by its total sales. Generally, a lower P/S ratio is better, and it indicates that the company is more undervalued, while a higher ratio indicates that it is overvalued.
Price-To-Book Ratio (P/B Ratio): The P/B ratio is a valuation metric that measures the price investors are willing to pay for each dollar of the company’s book value. It is calculated by dividing the market value per share by the book value per share. A P/B ratio of less than 1.0 indicates that the stock is undervalued, while a ratio greater than 1.0 indicates that it is overvalued. Check more on Buying Stocks today
Debt-Equity Ratio: The debt-equity ratio measures a company’s leverage, indicating the percentage of the company’s capital financing that is coming from lenders. It is calculated by dividing the company’s total debt by the equity invested in the company. A higher debt-equity ratio means a company is more leveraged, while a lower ratio indicates lower leverage.
Return on Equity (ROE): ROE is a profitability ratio that measures how much profit a company generates with the amount of equity capital invested. It is calculated by dividing the company’s net income by its shareholder’s equity. Check more on Buying Stocks today! The company is more efficient at generating profits with shareholder’s capital and is a positive sign for investors.
Return on Assets (ROA): ROA measures how much profit a company generates with its total assets. It is calculated by dividing the company’s net income by its total assets. A higher ROA indicates a more efficient use of assets by the company and is a positive sign for investors.
Current Ratio: The current ratio measures the company’s ability to pay off its short-term debts using its current assets. It is calculated by dividing the company’s current assets by its current liabilities in the stock market.
