7 Financial Ratios Every Stock Investor Must-Know

7 Financial Ratios Every Stock Investor Must-Know

Earnings Per Share (EPS)

Earnings per share (EPS) is a critical indicator in determining a company's profitability. It's computed by dividing a company's total profit during a given time by the number of shares it has listed on the stock exchange.

The earnings per share (EPS) formula is used to calculate the value of each outstanding share of a corporation. Because the amount of profit earned by firms and the number of shares they have listed on exchanges might differ, EPS provides a per-capita method of assessing each company.

You must first determine a company's net profit by collecting net income and subtracting any dividend payments before calculating earnings per share. Then divide that number by the number of outstanding shares, which is typically a weighted average over time.

Earnings Per Share (EPS) = (Net income - Dividends from preferred stock)/(Average outstanding shares)

Price to Earnings (PE) Ratio

The price to earnings ratio (PE Ratio) is a measure of a company's share price in relation to its annual net income per share. The current investor demand for a company's stock is represented by the PE ratio. Investors anticipate future earnings growth, therefore a high PE ratio often suggests greater demand. The PE ratio is expressed in years, which may be translated as the number of years it will take for earnings to cover the purchase price.

Because it shows how much an investor is ready to pay for one dollar of earnings, the PE ratio is commonly referred to as the "multiple." In the denominator, PE Ratios are frequently calculated using estimates of next year's profits per share.
Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)

Price-to-book value (PB)

Due to frequent fluctuations in the value of income statement components, P/E and other multiples derived using them can be volatile. You can get around this problem by using a price multiple based on a balance sheet metric, such as book value of equity. The current stock price of all outstanding shares is used to calculate the market value (i.e. the price that the market believes the company is worth). The book value is the amount left after the company has liquidated all of its assets and paid off all of its debts.

Debt to Equity (DE) Ratio

The debt-to-equity ratio compares a company's total debt to its total equity. A high debt-to-equity ratio is unfavorable for equity investors since it indicates a high level of risk. It depicts the relationship between the number of assets financed by creditors versus the amount financed by stockholders. The debt to equity ratio is also known as the "external-internal equity ratio" since it expresses the link between external equity (liabilities) and internal equity (stockholder's equity). More creditor financing (bank loans) is employed than investor financing when the debt to equity ratio is larger.

Return on Equity (ROE)

The RoE Ratio is a measure of a company's rate of return on its shares, as the name implies. In other words, it informs investors about the company's ability to generate profits through stock investments. Return on equity (ROE) is a metric for determining how well a company uses its equity - or the money given by its stockholders as well as cumulative retained earnings - to generate revenue. In other words, the ability of a corporation to convert equity capital into net profit is measured by its return on equity (ROE). The return on investment (ROI) is a metric that assesses both profit and efficiency. A growing ROE indicates that a corporation is generating more profits while using less capital. It also shows how successfully a company's management manages shareholder funds.

Return on Equity = (Net Income)/(Average Stockholder Equity)

Dividend Yield

The dividend yield, also known as the dividend-price ratio, is the amount of money or dividend paid to shareholders over the course of a year divided by the current stock price. It's a predictor of how much money you'll make. The dividend yield of a stock is computed by dividing the company's annual cash dividend per share by the stock's current price in annual percentages.

Dividend Yield = (Dividend per Share)/(Price per Share)*100

Current Ratio

This reflects the company's liquidity position, or how well equipped it is to satisfy short-term obligations with short-term assets. A higher number indicates that working capital concerns will not hinder the company's day-to-day operations. A current ratio of less than one is problematic.
The weight of total current assets versus total current liabilities is taken into account in this ratio. It shows a company's financial health and how it may make the most of its current assets to repay debts and payables.

Current Ratio = Current Assets / Current Liabilities