Description/ Specification of Stock Trading Service / Stock Advisory Service
Ratio Analysis For stock Investment. Ratio analysis Is a powerful tool for investment in shares of companies . There are various ratios calculated from company’s financial reports to measure various aspects like financial health, Performance, strength, risk profile, Benefits to investors etc. Ratio analysis is a part of the fundamental analysis approach to stock picking. Here we will discuss some the key ratios that one needs to consider before investing in a stock. Let us consider some of the key ratios here and understand their significance. These ratios are calculated with respect to a certain period, which can be a quarter, a half year, or a financial year. Gross profit margin(GPM): it is the profit earned after deducting operational expenses from the company’s total sales, divided by the total sales. It shows The company’s performance at an operational level, without considering the financial expenses. Net profit margin(NPM); It is the profit after deducting operational expenses and financial expense(like depreciation, Interest, and tax) from company’s total income, divided by the Total sales. It shows the performance of a company both at operational and financial level. Return on Equity(ROE): It is the earnings of a company expressed as a percentage of It’s Equity capital. It is again a measure of the earnings of company’s each share. If the share capital goes up, then ROE will decrease, even if the Earnings remains the same. Investors prefer a higher ROE value or one that keeps increasing. ROE= Earnings/Shareholder’s funds Return on Capital employed(ROCE): It is the earnings of a company, expressed as a percentage of it’s total capital, which is the sum of both equity and debt capital. As it takes care of both the debt and equity capital , it is a broader measure of how well the capital employed by the company is utilised. ROCE= Earnings/ (equity capital+ Debt capital) Investors prefer a higher ROCE value or one that keeps increasing. Earnings Per share(EPS); It is a company’s total earnings in a period such as a quarter or a year divided by the total no of shares. This indicates how much a company’s share is earning and is a key parameter in determining it’s market price. EPS = Total Earning/ No of equity Shares. The higher the EPS the better. Price to earnings (P/E) ratio: It is the market price of a share divided by EPS. It indicates the value that the market is assigning to each share of the company , as compared to it’s earnings. This ratio also indicates the future earnings outlook of the company. If the price increases for same level of earnings, then it indicates that the market participants are expecting better earnings from the company, and they are discounting it by assigning a higher price for the share. However, a too high P/E value may signify that the share is overpriced and hence risk is higher. Dividend yield: It is the dividend paid by the company over a period (typically an accounting year) divided by the price of an equity share. This indicates the return offered in the form of dividend as a percentage of share price. It may be noted that lower the price, higher will be the return obtained for the same amount of dividend. However since, after the payment of dividend, the market price lowers to the ex-dividend value, one should not by a share just for the sake of high dividend yield. Often the loss in market price becomes more than the gain in dividend. Besides high dividend is often paid by the companies with low growth outlook, as they are not able deploy the excess fund for profitable investments. Dividend yield – Dividend/Current price of the share Debt Equity Ratio: It is the total debt of the company divided by it’s Equity capital. It shows the leverage or risk profile of the company. A company with higher D/E ratio will spend more on paying interest on debt. So, there will be less left as profit. Generally, companies in the capital-intensive sectors that needs land , high-cost machinery, distribution channel, higher working capital etc are forced to borrow more to finance their capital needs. During downturn of the business cycle, they will have to pay the same level of interest on the debt capital, although the sales come down. This increases the losses. Therefore, investors often prefer companies with an asset light of nature of business so that they can manage with less assts and debt. Howebver , if a company finances business that earns adequately more than it’s debt servicing obligations, then a higher D/E ratio also can be justified. Debt-Equity Ratio= Debt/Equity Current Ratio: It is the ratio of current assets to current liabilities. This is an indicator of a company’s ability to service short term loans using it’s current or short-term assets. Current Ratio= Current assets/Current liabilities Quick ratio: It is the ratio of current assets less Inventory to current liabilities. More like current ratio, but does not consider inventory as current assets , due to their less liquid nature of it. Quick ratio= (Current Assets-Inventory ) / Current liabilities Inventory Turnover ratio: it is calculated by dividing the cost of goods sold in a period by the average Inventory value. It shows how many times a company’s inventory is exhausted, which is a measure of sales growth of the company. Inventory Turnover ratio= Total sales/ Inventory Book value: It is the total of equity capital of the company and it’s retained earnings, divided by the number of equity shares. The growth in book value reflects a growth in company’s shareholder’s fund and hence the worth of share. Book value grows when a company retains a part of the profit as retained earnings, instead of dividing it in the form of dividend to shareholders. To conclude an investor should pay attention to the above-mentioned ratios to determine whether the share offers capital appreciation opportunities and decide for investment depending on his risk appetite and investment goals. Please note that this is not a professional financial advice. To get a professional financial advice , contact a certified professional financial advisor.
Stock Trading Service / Stock Advisory Service
Ratio Analysis For stock Investment. Ratio analysis Is a powerful tool for investment in shares of companies . There are various ratios calculated from company’s financial reports to measure various aspects like financial health, Performance, strength, risk profile, Benefits to investors etc. Ratio analysis is a part of the fundamental analysis approach to stock picking. Here we will discuss some the key ratios that one needs to consider before investing in a stock. Let us consider some of the key ratios here and understand their significance. These ratios are calculated with respect to a certain period, which can be a quarter, a half year, or a financial year. Gross profit margin(GPM): it is the profit earned after deducting operational expenses from the company’s total sales, divided by the total sales. It shows The company’s performance at an operational level, without considering the financial expenses. Net profit margin(NPM); It is the profit after deducting operational expenses and financial expense(like depreciation, Interest, and tax) from company’s total income, divided by the Total sales. It shows the performance of a company both at operational and financial level. Return on Equity(ROE): It is the earnings of a company expressed as a percentage of It’s Equity capital. It is again a measure of the earnings of company’s each share. If the share capital goes up, then ROE will decrease, even if the Earnings remains the same. Investors prefer a higher ROE value or one that keeps increasing. ROE= Earnings/Shareholder’s funds Return on Capital employed(ROCE): It is the earnings of a company, expressed as a percentage of it’s total capital, which is the sum of both equity and debt capital. As it takes care of both the debt and equity capital , it is a broader measure of how well the capital employed by the company is utilised. ROCE= Earnings/ (equity capital+ Debt capital) Investors prefer a higher ROCE value or one that keeps increasing. Earnings Per share(EPS); It is a company’s total earnings in a period such as a quarter or a year divided by the total no of shares. This indicates how much a company’s share is earning and is a key parameter in determining it’s market price. EPS = Total Earning/ No of equity Shares. The higher the EPS the better. Price to earnings (P/E) ratio: It is the market price of a share divided by EPS. It indicates the value that the market is assigning to each share of the company , as compared to it’s earnings. This ratio also indicates the future earnings outlook of the company. If the price increases for same level of earnings, then it indicates that the market participants are expecting better earnings from the company, and they are discounting it by assigning a higher price for the share. However, a too high P/E value may signify that the share is overpriced and hence risk is higher. Dividend yield: It is the dividend paid by the company over a period (typically an accounting year) divided by the price of an equity share. This indicates the return offered in the form of dividend as a percentage of share price. It may be noted that lower the price, higher will be the return obtained for the same amount of dividend. However since, after the payment of dividend, the market price lowers to the ex-dividend value, one should not by a share just for the sake of high dividend yield. Often the loss in market price becomes more than the gain in dividend. Besides high dividend is often paid by the companies with low growth outlook, as they are not able deploy the excess fund for profitable investments. Dividend yield – Dividend/Current price of the share Debt Equity Ratio: It is the total debt of the company divided by it’s Equity capital. It shows the leverage or risk profile of the company. A company with higher D/E ratio will spend more on paying interest on debt. So, there will be less left as profit. Generally, companies in the capital-intensive sectors that needs land , high-cost machinery, distribution channel, higher working capital etc are forced to borrow more to finance their capital needs. During downturn of the business cycle, they will have to pay the same level of interest on the debt capital, although the sales come down. This increases the losses. Therefore, investors often prefer companies with an asset light of nature of business so that they can manage with less assts and debt. Howebver , if a company finances business that earns adequately more than it’s debt servicing obligations, then a higher D/E ratio also can be justified. Debt-Equity Ratio= Debt/Equity Current Ratio: It is the ratio of current assets to current liabilities. This is an indicator of a company’s ability to service short term loans using it’s current or short-term assets. Current Ratio= Current assets/Current liabilities Quick ratio: It is the ratio of current assets less Inventory to current liabilities. More like current ratio, but does not consider inventory as current assets , due to their less liquid nature of it. Quick ratio= (Current Assets-Inventory ) / Current liabilities Inventory Turnover ratio: it is calculated by dividing the cost of goods sold in a period by the average Inventory value. It shows how many times a company’s inventory is exhausted, which is a measure of sales growth of the company. Inventory Turnover ratio= Total sales/ Inventory Book value: It is the total of equity capital of the company and it’s retained earnings, divided by the number of equity shares. The growth in book value reflects a growth in company’s shareholder’s fund and hence the worth of share. Book value grows when a company retains a part of the profit as retained earnings, instead of dividing it in the form of dividend to shareholders. To conclude an investor should pay attention to the above-mentioned ratios to determine whether the share offers capital appreciation opportunities and decide for investment depending on his risk appetite and investment goals. Please note that this is not a professional financial advice. To get a professional financial advice , contact a certified professional financial advisor.
