Ratios to look before buying a share (Stock)
Ratios to look before buying a stock (share)
In this blog we will discuss about 8 ratios which plays a vital role in determining the intrinsic value of a stock.
1) Ploughback & Reserves Ratio-:
The plowback ratio is a fundamental analysis ratio that measures how much earnings are retained after dividends are paid out. It is most often referred to as the retention ratio. The opposite metric, measuring how much in dividends are paid out as a percentage of earnings, is known as the payout ratio.
2) Book Value Per Share Ratio-:
The book value per share (BVPS) is a ratio that weighs stockholders' total equity against the number of shares outstanding. In other words, this measures a company's total assets, minus its total liabilities, on a per-share basis.
3) Earning Per Share Ratio-:
Earnings per share or EPS is an important financial measure, which indicates the profitability of a company. It is calculated by dividing the company's net income with its total number of outstanding shares. The higher the earnings per share of a company, the better is its profitability.
4) Price-to-Earning Ratio (PE Ratio)-:
P/E Ratio or Price to Earnings Ratio is the ratio of the current price of a company’s share in relation to its earnings per share (EPS). Analysts and investors can consider earnings from different periods for the calculation of this ratio; however, the most commonly used variable is the earnings of a company from the last 12 months or one year. It is also referred to as price multiple of earnings multiple.
P/E Ratio Formula
P/E Ratio = (Current Market Price of a Share / Earnings per Share)
5) Dividend & Yield Ratio-:
The dividend yield is a financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year. For example, if a company has a $20 share price and pays a dividend of $1.00 per year, its dividend yield would be 5%.
A good dividend yield will vary with interest rates and general market conditions, but typically a yield of 4 to 6 percent is considered quite good. A lower yield may not be enough justification for investors to buy a stock just for the dividend income.
6) Return on Capital Employed (ROCE) Ratio-:
Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency. In other words, this ratio can help to understand how well a company is generating profits from its capital as it is put to use.
Determine the benchmark ROCE of the industry. For example, a company with a ROCE of 20% may look good compared to a company with a ROCE of 10%. However, if the industry benchmark is 35%, both companies are considered to have a poor ROCE.
7) Return on net worth (RONW) Ratio-:
Return on Net Worth (RONW) is a calculation of the profitability of a company expressed in percentage. The RoNW is calculated by dividing the net income of the firm in question by shareholders' equity. So, the ratio is developed from the perspective of the investor and not the company.
A high RONW percentage is indicative of the prudent use of shareholders' money while a low percentage indicates less efficient deployment of equity resources. RONW is a vote of the efficiency of a company's management.
8) PEG ratio -:
The 'PEG ratio' is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate.
As a general rule, a PEG ratio of 1.0 or lower suggests a stock is fairly priced or even undervalued. A PEG ratio above 1.0 suggests a stock is overvalued.
These are the 8 ratios which a ideal investor look before investing in any stock.
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