SIX Ratios every Investor Must Know

Hii everyone, 

In this blog I'm trying to give you some Better and useful idea about 6 most important Ratios which we must have to consider to understand a company and its working, so that you can get an idea whether to invest in that company's stock or not.

These ratios are actually properly understood and applied on every aspect to calculate a company's worth. By using these ratios one can pick stocks for their portfolio.

Different Ratios :

1. Current Ratio 

2. Debt to Equity Ratio 

3. Return on Equity 

4. Price to Earnings 

5. PEG Ratio 

6. Price to Book value 

some other important parameters to consider.

1. Earnings per share 

2. Quick Ratio 

3. working capital Ratio 

Current Ratio :

It is the Ratio of currents assets to the current liabilities. 

It mainly measures about the the short term liquidity.

It tells the investors about how a company can maximize its assets in its annual balance sheet to balance its current debt and other extra payables.

Debt to Equity Ratio 

It is the Ratio of "Total liabilities to the share holders.

It mainly explains about the company's leverage. 

it mainly checks how leveraged one stock is, it also a measure of degree about how one company is operating its finances thorough their debt vs owned funds. 

    Value should be as low as possible for good stocks.

Return on Equity

It is the Ratio of Net income to the average share holder's equity. This Ratio mainly gives us the information of how a company could reinvest very well with it's profits.

the basic definition of ROE is it measures the rate of return on the assets/ investments they got from the share holders. 

The ideal ROE of a company should  basically around 15-20% for better returns.

Price to Earnings Ratio:

This is one of the basic and also the important key Ratio factor to Consider for any company.

It is the Ratio of share price to the Earnings per share.

it is also known as PER or P/E Ratio or P/E, as the P/E increases investors expects a higher growth in the company and also its share price. At present our Indian S&P P/E is of 13 to 15, so if a company have much higher than that price, then that company should grow more than S&P over all market growth in that period of time.

 

PEG Ratio:

'PEG Ratio' is a important metric for defining the relative trade-off between the price of the stock, the earnings produced per share, and the company's expected growth as a whole. 

basically PEG Ratio should be less than 1 but companies having PEG Ratio > 1 are considered as unwanted and stock is referred as the over valued.

High PEG Ratio means it indicates the company's stock price is over valued. 

PRICE TO BOOK VALUE:

This is also generally a high usage Ratio to check the stock quality.

It is the Ratio of market price per share to the book value per share. 

basically all the investors and advisors consider P/B Ratio less than 1 as a good value to have a stock in the portfolio, but they comes as undervalued stocks as they are trading lower then the expected, so considering 1 to 3 P/B is also a good value for a good stock. 

Basically we consider this P/B Ratio to indicate or determine a stock is either under valued or over valued. 

some important Ratios one can consider are: 

1. Earnings per share(EPS) :

It gives is the information about the Ratio of Net income of the company to the outstanding shares. 

this EPS value could be as high as possible.

2. Quick Ratio :

It tells us the information about the company's liability 

it measures the ability of a company to pay all of its liabilities which are outstanding without selling any of its inventory.

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