Ratio Analysis for the Investors -

In the stock market, several key ratios are used by investors to evaluate the attractiveness and performance of stocks. Here are some essential ratios:
Price-to-Earnings (P/E) Ratio:
Formula: Market Price per Share / Earnings per Share (EPS)
Purpose: Measures how much investors are willing to pay per dollar of earnings. A high P/E may indicate high growth expectations, while a low P/E may suggest undervaluation or poor growth prospects.
Price-to-Book (P/B) Ratio:
Formula: Market Price per Share / Book Value per Share
Purpose: Compares a company’s market value to its book value. A P/B ratio below 1.0 might indicate that the stock is undervalued, while a higher ratio suggests overvaluation.
Dividend Yield:
Formula: Annual Dividends per Share / Market Price per Share
Purpose: Measures the return on investment from dividends alone. It’s particularly useful for income-focused investors.
Earnings per Share (EPS):
Formula: Net Income / Weighted Average Shares Outstanding
Purpose: Indicates a company’s profitability on a per-share basis. Rising EPS suggests a company is increasing its profit.
Price-to-Earnings Growth (PEG) Ratio:
Formula: P/E Ratio / Annual EPS Growth Rate
Purpose: Adjusts the P/E ratio by growth rate to assess if a stock is overvalued or undervalued relative to its growth potential.
Price-to-Sales (P/S) Ratio:
Formula: Market Price per Share / Sales per Share
Purpose: Valuates a company based on its sales rather than earnings, useful for assessing companies with low or negative earnings.
Debt-to-Equity (D/E) Ratio:
Formula: Total Debt / Shareholders’ Equity
Purpose: Indicates the proportion of debt used to finance the company’s assets, helping assess financial leverage and risk.
Return on Equity (ROE):
Formula: Net Income / Shareholders’ Equity
Purpose: Measures how effectively a company is using shareholders’ equity to generate profits.
Return on Assets (ROA):
Formula: Net Income / Total Assets
Purpose: Assesses how efficiently a company is using its assets to generate profit.
Interest Coverage Ratio:
Formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense
Purpose: Measures a company’s ability to meet its interest payments, indicating financial stability.
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