This guide introduces the most significant financial ratios that investors use to gauge the health of a company. A financial ratio comes from a financial statement, and is simply one number divided by another. This spreadsheet lets you compare financial ratios for up to ten different companies by automatically downloading data from the web.
The Earnings per Share or EPS is the profit divided by the number of outstanding shares — it represents your share of the company profits for every share you own. Preferred shares are not included, and the company may issue more shares. This value is quoted everywhere, and should be easy to find for any single company. A share issue increases the number of shares, and hence dilutes or reduces EPS.
If revenue from the share issue is successfully used to fund a growth in the business, then EPS will eventually increases. EPS can be easily manipulated because it is based on net income. For example, management can shift revenue and expenses from one quarter to another.
Any investor worth their salt needs to be familiar with the Price to Earnings ratio or PE. It represents how much an investor pays for every dollar the company earns, and is a fundamental measure of stock value. PE needs to be interpreted carefully. Scrutinized alone, PE does not describe the value of a company. Usually, the PE of several companies in one sector are analyzed together, since different industries will grow at different rates. The Price-to-Sales PS ratio compares the share price of a company to its sales per share.
The PS ratio is used to filter companies in an industry that has suffered a setback. For example, computer chip manufacturing is cyclical, and the entire industry can suffer years of significantly reduced earnings and hence the PE ratio cannot be calculated.
A company within that industry with a lower PS ratio than its peers will have better prospects than the others. This ratio compares how much suppliers and creditors have given the company versus the amount given by shareholders.
The lower the value, the stronger the equity position. Good debt to equity ratios vary from industry to industry, with capital-intensive industries having higher values.
This is the annual dividend paid out per share divided by the share price. The dividend yield can be compared to the prevailing risk-free interest rate to determine if a company represents a good investment.
A company that has paid out a constant stream of dividends over many years is often considered safe. An investor that needs a cash flow, for example, may invest in a portfolio of stocks with high and consistent dividend yields. The Price to Book Ratio compares the share price to an estimate of the value of the company per share.
The denominator is essentially how much money would be left if the company was sold and the assets sold to pay any debts and liabilities.
In the UK, this ratio is called the Dividend Cover. The Dividend Payout ratio needs to interpreted carefully. For example, a company with a high Dividend Payout ratio may not be investing for future growth; in this case, the dividend is at risk of being reduced.
A rapidly growing company that is investing in future expansion may only have a low Dividend Payout ratio. It measures if easily liquidated assets are enough to cover short-term liabilities i. A higher value is better. A higher Current ratio is better, with a value of two indicating good financial health.
A value lower than one means that a company would struggle to pay its debt if they were due. This does not mean that the company is at risk of bankruptcy. The Current ratio can be too high. Current ratios should only be compared between companies in the same industry; a high or low current ratio would only make sense in this context. The Quick ratio is a more conservative version of the Current ratio. The Quick ratio does not include inventory in the current assets, as these may not be easily liquidated.
We'll assume you're ok with this, but you can opt-out if you wish. Twitter Tweets by investexcel.More...