8 Simple Investing Ratios You Need To Know - Financial Ratios
MONEY Morning News - Friday 16.8.2013
There is a lot to be said for valuing a company, it is no easy task. If you have yet to discover this goldmine, the satisfaction one gets from tearing apart a companies financial statements and analyzing it on a whole different level is great - especially if you make or save yourself money for
your efforts.
your efforts.
1. Earnings Per Share
Before you can understand many of these ratios it is important to learn what earnings per share (EPS) is. EPS is basically the profit that a company has made over the last year divided by how many shares are on the market.
It gets a little more complicated because you don't include preferred shares, also the number of shares could change throughout the year. But don't worry this number will be given to you on any financial website.
It gets a little more complicated because you don't include preferred shares, also the number of shares could change throughout the year. But don't worry this number will be given to you on any financial website.
2. Price to Earnings Ratio
The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. A high P/E ratio means investors are paying more for today's earnings in anticipation of future earnings growth. The basic formula for calculating the P/E ratio is fairly standard. There is never a problem with the numerator - an investor can obtain a current closing stock price from various sources, and they'll all generate the same dollar figure, which, of course, is a per-share number. However, there are a number of variations in the numbers used for the EPS figure in the denominator. The most commonly used EPS dollar figures include the following: Basic earnings per share - based on the past 12 months. Estimated basic earnings per share - based on a forward 12-month projection
3. Price to Sales Ratio
A stock's price/sales ratio (P/S ratio) is another stock valuation indicator similar to the P/E ratio. The P/S ratio measures the price of a company's stock against its annual sales, instead of earnings. Like the P/E ratio, the P/S reflects how many times investors are paying for every dollar of a company's sales.
In this example the price of a share is divided by the sales ($3,286) which is adjusted for average share outstanding throughout the year (3,286/247.1). This results in paying 5.1 dollars for every dollar of sales.
In this example the price of a share is divided by the sales ($3,286) which is adjusted for average share outstanding throughout the year (3,286/247.1). This results in paying 5.1 dollars for every dollar of sales.
4. Debt To Equity Ratio
The debt-equity ratio is a leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed.
A lower number means that a company is using less leverage and has a stronger equity position. This ratio is not a pure measurement of a company's debt because it includes operational liabilities in total liabilities, nevertheless, this easy-to-calculate ratio provides a general indication of a company's equity-liability relationship.
A lower number means that a company is using less leverage and has a stronger equity position. This ratio is not a pure measurement of a company's debt because it includes operational liabilities in total liabilities, nevertheless, this easy-to-calculate ratio provides a general indication of a company's equity-liability relationship.
5. Dividend Yield
A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock.
The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. In this example the $1 dividend and $67.44 share price creates a 1.48% yield.
The dividend yield is found in the stock quotes of dividend-paying companies. Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. In this example the $1 dividend and $67.44 share price creates a 1.48% yield.
6. Price To Book Ratio
This Ratio compares a stock's per-share price (market value) to its book value (shareholders' equity). The price-to-book value ratio, expressed as a multiple (i.e. how many times a company's stock is trading per share compared to the company's book value per share), is an indication of how much shareholders are paying for the net assets of a company. "price-to-book", provides investors a way to compare the market value, or what they are paying for each share, to a conservative measure of the value of the firm. In this example the share price is divided by the book value (adjusted into a per share number).
7. Payout Ratio
This ratio tells you how much profit goes out in dividends. This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment. Dividends are paid at the discretion of management, if the percentage is too high (over about 75%) then the dividend could be cut. If the result is low then the dividend payment could continue into the future.
8. Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. In this example current assets are valued well over 2 times the current liabilities.
Equity Valuation: The Comparables Approach
Click - Quantitative Example on Equity Valuation
The main purpose of equity valuation is to estimate a value for a firm or security.
A key assumption of any fundamental value technique is that the value of the security (in this case an equity or a stock) is driven by the fundamentals of the firm’s underlying business at the end of the day.
There are three primary equity valuation models: the discounted cash flow (DCF), cost and comparable approaches. The comparable model is a relative valuation approach and is explained in more detail below.
Comp Models Introduced-The basic premise of the comparables approach is that an equity’s value should bear some resemblance to other equities in a similar class. For a stock, this can simply be determined by comparing a firm to its key rivals, or at least those rivals that operate similar businesses. Discrepancies in the value between similar firms could spell opportunity. The hope is that it means the equity being valued is undervalued and can be bought and held until the value increases. The opposite could hold true, which could present opportunity for shorting the stock, or positioning one’s portfolio to profit from a decline in its price.
There are two primary comparable approaches. The first is the most common and looks at market comparables for a firm and its peers. Common market multiples include the following: enterprise value to sales (EV/S), enterprise multiple, price to earnings (P/E), price to book (P/B) and price to free cash flow (P/FCF). To get a better indication of how a firm compares to rivals, analysts can also look at how its margin levels compare. For instance, an activist investor could make the argument that a company with averages below peers is ripe for a turnaround and subsequent increase in value should improvements occur.
The second comparables approach looks at market transactions where similar firms, or at least similar divisions, have been bought out or acquired by other rivals, private equity firms or other classes of large, deep-pocketed investors. Using this approach, an investor can get a feel for the value of the equity being valued. Combined with using market statistics to compare a firm to key rivals, multiples can be estimated to come to a reasonable estimate of the value for a firm.
The Bottom Line
Valuation is as much art as science. Instead of obsessing over what the true dollar figure of an equity might be, it is most valuable to come down to a valuation range. For instance, if a stock trades toward the lower end, or below the lower end of a determined range, it is likely a good value. The opposite may hold true at the high end and could indicate a shorting opportunity.
Find out more the 5 tips and tools on evaluating stocks investment below:- ( sources extracted from the Investopedia.com)
1. Top 7 Technical Analysis Tools
2. Candlestick Charts
3. 8 Ways To Survive A Market Downturn
4. Investing During Uncertainty
5. Survival Tips For A Stormy Market
A key assumption of any fundamental value technique is that the value of the security (in this case an equity or a stock) is driven by the fundamentals of the firm’s underlying business at the end of the day.
There are three primary equity valuation models: the discounted cash flow (DCF), cost and comparable approaches. The comparable model is a relative valuation approach and is explained in more detail below.
Comp Models Introduced-The basic premise of the comparables approach is that an equity’s value should bear some resemblance to other equities in a similar class. For a stock, this can simply be determined by comparing a firm to its key rivals, or at least those rivals that operate similar businesses. Discrepancies in the value between similar firms could spell opportunity. The hope is that it means the equity being valued is undervalued and can be bought and held until the value increases. The opposite could hold true, which could present opportunity for shorting the stock, or positioning one’s portfolio to profit from a decline in its price.
There are two primary comparable approaches. The first is the most common and looks at market comparables for a firm and its peers. Common market multiples include the following: enterprise value to sales (EV/S), enterprise multiple, price to earnings (P/E), price to book (P/B) and price to free cash flow (P/FCF). To get a better indication of how a firm compares to rivals, analysts can also look at how its margin levels compare. For instance, an activist investor could make the argument that a company with averages below peers is ripe for a turnaround and subsequent increase in value should improvements occur.
The second comparables approach looks at market transactions where similar firms, or at least similar divisions, have been bought out or acquired by other rivals, private equity firms or other classes of large, deep-pocketed investors. Using this approach, an investor can get a feel for the value of the equity being valued. Combined with using market statistics to compare a firm to key rivals, multiples can be estimated to come to a reasonable estimate of the value for a firm.
The Bottom Line
Valuation is as much art as science. Instead of obsessing over what the true dollar figure of an equity might be, it is most valuable to come down to a valuation range. For instance, if a stock trades toward the lower end, or below the lower end of a determined range, it is likely a good value. The opposite may hold true at the high end and could indicate a shorting opportunity.
Find out more the 5 tips and tools on evaluating stocks investment below:- ( sources extracted from the Investopedia.com)
1. Top 7 Technical Analysis Tools
2. Candlestick Charts
3. 8 Ways To Survive A Market Downturn
4. Investing During Uncertainty
5. Survival Tips For A Stormy Market