{"id":7665,"date":"2021-06-24T17:17:07","date_gmt":"2021-06-24T11:47:07","guid":{"rendered":"https:\/\/boomingbulls.com\/?p=7665"},"modified":"2022-12-26T14:27:04","modified_gmt":"2022-12-26T08:57:04","slug":"7-most-important-financial-ratios","status":"publish","type":"post","link":"https:\/\/boomingbulls.com\/blogs\/7-most-important-financial-ratios\/","title":{"rendered":"7 Most Important Financial Ratios That Every Trader Should Know"},"content":{"rendered":"
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7 Most Important Financial Ratios That Every Trader Should Know<\/h1>\n

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In today\u2019s article, I am going to talk about the 7 Most Important Financial Ratios That Every Trader Should Know. Financial Ratios are the most important factors of the balance sheet<\/a> of any company. Before going deep into this topic let us understand-<\/p>\n

\u2981 What are the financial ratios and why are they useful?<\/h2>\n

Financial Ratios are derived from the balance sheet of the company which represents the important information. Financial Ratios are used to do the Fundamental Analysis of the company.<\/p>\n

Financial Ratios are used to simplify complicated things. There are a lot of factors that are present on the balance sheet of a company. It is impossible to analyze all these factors and compare them with others. Instead of this, a trader can simply compare two companies by using Financial Ratios to get a better investment opportunity.
\nLet\u2019s take a look at some of the important financial ratios;<\/p>\n

1. Price To Earnings Ratio (PE Ratio)<\/h3>\n

This is the most widely used Financial Ratio. PE Ratio is defined as the Current share price divided by earning per share. In short How many rupees you invest in that company to earn 1 rupee.
\nIn mathematical terms,<\/p>\n

\"\"<\/p>\n

A high PE Ratio indicates that traders are expecting high earnings growth from the company in the near future. Lower PE indicates that the company is undervalued. In general, if you are looking for value stock then a low PE ratio is preferred. However, every sector has different PE ratios. You can\u2019t compare metal sector stock PE with IT sector stock PE. It is a totally illogical comparison.<\/p>\n

2. Earning Per Share (EPS)<\/strong><\/h3>\n

It is the most basic and most Financial Ratio. EPS is defined as the profit of the company per outstanding share. EPS can be calculated in 2 ways-<\/p>\n

    \n
  1. Earnings Per Share:<\/strong> Net Income after Tax\/Total Number of Outstanding Shares.<\/li>\n
  2. Weighted Earnings Per Share:<\/strong> (Net Income after Tax – Total Dividends)\/Total Number of Outstanding Shares.<\/li>\n<\/ol>\n

    Higher EPS indicates that the return on a single share is high. From the trader’s point of view, it is always good to invest in a company which is having higher and growing EPS. Before investing in any company for the long term, you should always check that company’s EPS for the last 5 years. If it is continuously growing then it is a good company to invest in otherwise you can search for better options.<\/p>\n

    3. Price To Book Value Ratio (PBV)<\/h3>\n

    The Price to Book Value Ratio or Price to Book Ratio gives the relation between a company\u2019s current value and its book value. Book value is the value of all assets owned by the company.
    \nFormula for P\/B ratio = Market capitalisation \/ book value.<\/p>\n

    This ratio helps inventors to recognize undervalued companies. Generally, a PB ratio below 1 indicates an undervalued company but PB less than 1 also indicates that there are some other problems with the company because of which it is not showing earnings. So, traders need to look at the other parameters of the company as well. Also, many traders and financial analysts consider any value under 3.0 as a good PB ratio.<\/p>\n

    4. Debt-to-Equity Ratio<\/h3>\n

    The debt-to-Equity ratio also called as Risk Ratio used to calculate total debt and liabilities against shareholders’ equity. If the debt-to-equity ratio is less than one, then your investment in that company is less risky than the company with a high Debt-to-Equity ratio.
    \nA company which is having a Debt-to-Equity ratio of more than one is using more leverage to run its business operations. That is why the risk is more and one should review their investment before investing in such types of companies.<\/p>\n

    5. ROE (Return On Equity)<\/h3>\n

    This is the most important ratio when it comes to the profitability of the company. It is calculated by dividing net income by shareholders’ equity.
    \nIn mathematical terms,<\/p>\n

    \"\"<\/p>\n

    If ROE is more, it represents the company is earning more profit from its operations. In this way, ROE is one of the parameters to determine the profitability of the company. As a thumb rule, always look for the companies which are having ROE higher than 20%.<\/p>\n

    6. Dividend Yield<\/h3>\n

    A stock dividend yield can be calculated by the company\u2019s annual cash dividend per year by the current price of the share. Dividend Yield is represented in a percentage. This ratio estimates how much a trader can make through dividends by investing in that company.
    \nThe formula for Dividend Yield is,<\/p>\n

    \"\"<\/p>\n

    7. Current Ratio<\/h3>\n

    This ratio is calculated to get an idea about the liquidity<\/a> or current working capital of the company. This ratio is obtained by dividing current assets by current assets.<\/p>\n

    \"\"<\/p>\n

    This ratio also shows that How to prepare the company is to meet its short-term obligations with short-term assets. A current ratio less than one is generally considered a bad current ratio.<\/p>\n

    I hope in today\u2019s article, I was able to explain to you different financial ratios that every beginner should know before investing in a particular company. If you want to know more about the basics of the stock market then do check out our previous blog of the series, \u201cBest Beginner\u2019s Guide to the Stock Market | Module 2 | All About Stock Market Indices\u201d<\/a>. Also, if you have any doubt regarding this concept then, please post it in the comment section.<\/p>\n

    If you want to know more about Risk Management & Intraday Trading Strategies you can refer to our previous blog on<\/p>\n

    Importance Of Risk Management In Trading<\/a>\u00a0and\u00a010 Best Intraday Trading Strategies.<\/a><\/p>\n

     <\/p>\n

    Open a Demat Account using our link to get support from us \u2013\u00a0<\/span>https:\/\/bit.ly\/3gyhIWN<\/a>\u00a0<\/span>and send your ID to\u00a0<\/span>demat@boomingbulls.com<\/p>\n

    Happy Learning!<\/span><\/p>\n

     <\/p>\n

    \"\"<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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