In case you have made a decision about to invest in individual stocks, you must have knowledge about how to calculate the financial ratios. If you going to take information about stock from your broker or from the website, you still need to learn about how it works.
These ratios will let you know about the position of company stock in which you are going to invest. If you ignore this, you may lead toward the risk of buying the stock of a company with huge amount of debt, the uncertainty of risk, low profitability, and minimum cash for its survival.
The Most Important Financial Ratios for New Investors
If you are a new investor, and you want to invest in the stock of the company, then you must learn below the most important ratios to analyze the company performance:
Price to Cash Flow Ratio:
is the profitability ratio that used to compare the company’s stock price with underlying cash flow. The sole purpose of this ratio is to find out the total worth of the company with the help of total amount of cash flow generated by the business.
As its name shows this ratio only calculate cash item and ignore all the non-cash items. With it you can make a comparison with the market value in order to demonstrate either the valuation is justified or not.
Price to Earnings Ratio – The P/E Ratio:
this is the most useful ratio for the investor, which is the easiest way to find out about how much the how “cheap” or “expensive” the company stock is. With the help of this ratio, the investor can make an analysis about how much he should pay for the stock on the basis of its every single $ earning.
The PEG Ratio:
It is short form of price-to-earnings-to-growth ratio, also known as p/e ratio. This is most valuable ratio for calculation and valuation of two stock. As its name shows that this ratio tell us about the growth of the company.
Asset Turnover Ratio: help the new investor to calculate the total sale of the company against each single dollar of asset. It tells us about how the company is efficient by using its current and fixed assets.
It is the most important ratio among all other financial ratios. If you have command on this ratio, then you can test any company’s strength and its efficiency. By this you can know how much cash on hand is available with the company.
Debt to Equity Ratio:
It is another most important ratio, used to total worth of the company to its total obligations.
Net Profit Margin Ratio:
it tells the investor about hwo much company makes money for each single $ in revenue. The companies with higher profit margin is able to provide incentives, bonus and fatter dividend to its stockholder.
Other most important ratios that you learn as under:
• Interest Coverage Ratio
• Inventory Turnover Ratio
• Net Profit Margin Ratio
• Operating Profit Margin Ratio
• Quick Test Ratio
• Receivable Turns
• Return on Assets (ROA) Ratio
• Return on Equity (ROE) Ratio
• Advanced Return on Equity: The DuPont Model