SIMPLE RATIOS FOR FUNDAMENTAL ANALYSIS | அடிப்படை பகுப்பாய்விற்கான எளிய விகிதங்கள்

 

SIMPLE RATIOS FOR FUNDAMENTAL ANALYSIS

In our previous post, we have discussed the important factors for the fundamental analysis. In order to carry forward the fundamental analysis of a company, we have to analyze some basic ratios to know the financial strength of the company and its performance in the stock market. In this post, we are going to see some of the basic and important ratios to be analyzed while doing a fundamental analysis of a company.

1. EPS [ EARNINGS PER SHARE ]: 

It is calculated by dividing the net profit of a company by the number of outstanding shares the company has.

EPS = Net Profit of the company / No. of Outstanding shares

The higher the earnings per share of a company, the better its profitability.

2. P/E RATIO [ PRICE TO EARNINGS RATIO ]:

It is obtained by dividing the current share price of the company by its EPS (Earnings per share).

P/E Ratio = Current share price of the company / EPS

A higher P/E ratio may indicate that the stock is over-valued. At the same time, a lower P/E ratio indicates the stock is undervalued.  A good P/E ratio for a company should be in the range of 15 - 25. But It may vary according to different sectors.

3. P/B RATIO [ PRICE TO BOOK RATIO ]:

It is the valuation of a company, It gives us a complete picture of the company's current market value, to its measured book value.

P/B Ratio = Current Market Price per share / Book value of assets per share

i.e.) Book value of assets per share = Total assets - Total liabilities.

Ideally, A stock which is having a P/B Ratio in the range of 1 - 2 is considered to be a good stock for investment. 

4. DEBT TO EQUITY RATIO:

It is a measure of how much money companies borrow versus how much they own themselves. It refers to the ability of shareholder equity to pay down all outstanding debt in the event of a downturn is demonstrated.

Debt to Equity = Total Liabilities / Shareholder's Equity

i.e.) Liabilities: Debts of the company.

Shareholder's equity: Net asset value the company owns. [Net asset: assets-liabilities]

 

A good Debt to equity ratio should fall in the range of 1.2 to 2. A low Debt to equity ratio indicates a good company for investment.

5. ROE [Return On Equity]:

It can be calculated as the net income of the company divided by its shareholder's equity. Shareholder's equity equals the net value of a company's assets minus its liabilities.

The return on equity (ROE), which is a measure of a company's management efficiency, is a ratio investors can use to assess how well a company is spending the money that shareholders have invested in the company.

ROE = Net Income / Shareholder's Equity

i.e.) Shareholder's equity: Net asset value the company owns. [Net asset: assets-liabilities]

Basically, ROE values in the range of 15% - 25% are considered good for the company.

6. DIVIDEND TO PRICE RATIO [DIVIDEND YIELD]:

It is a percentage to exhibit how much a company pays out in dividends every year, as a percentage of its share price.

Dividend to price ratio: Dividend per share / Share price

This ratio may not be applicable to all the stock, it may be useful for the stock which is paying out dividends. Also, it doesn't mean that the companies which are not paying out dividends are bad companies. If a company is paying out dividends with the profit they have gained, then this ratio is useful to find whether they really sharing a good amount of profit with their shareholders every year.

A good dividend yield can be in the range of 1% to 3% or above.

7. WORKING CAPITAL RATIO : 

An organization's working capital ratio is a measure of liquidity, showing whether or not it can pay its obligations.

Working capital ratio = Current Assets / Current Liabilities.

Depending on the industry, the ideal working capital ratio can range between 1.5 and 2.0, but industry-specific figures may differ. 

8. OPERATING PROFIT MARGIN [OPM]:

It is a measure of a company's profitability or performance that illustrates how much profit it makes from its operations before subtracting taxes and interest charges.

OPM = Operating Income / Total Revenue

It is considered good to have an operating margin above 15% for most businesses. You can also examine operating margin trends to see whether they have gone up or down in the past.

DISCLAIMER:-

The content of this site is only for educational purpose. I am not SEBI Registered. The motive of this site is to share my knowledge on share market to new budding investors and others who are learning about stock market

My Kind request to my site viewers, Before taking any decision please do self analysis, consult or discuss with Your financial Advisor .

மறுப்பு:-

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