Breaking News

# 6 financial ratios that every equity investor should know

## Earnings per share (EPS)

Earnings per share (EPS) is an essential indicator in determining the profitability of a company. It is calculated by dividing the total profit of a company during a given time by the number of shares it has listed on the stock exchange.

The earnings per share (EPS) formula is used to calculate the value of each outstanding share of a company. Since the amount of profit made by companies and the number of stocks they have listed on the stock exchange may differ, EPS provides a per capita valuation method for each company.

You must first determine a company’s net profit by collecting net income and subtracting dividend payments before calculating earnings per share. Then divide that number by the number of shares outstanding, which I

## Price / earnings ratio (PE)

The price-to-earnings ratio (PE ratio) is a measure of a company’s share price relative to its annual net earnings per share. The current investor demand for a company’s shares is represented by the PE ratio. Investors anticipate future earnings growth, therefore, a high PE ratio often suggests greater demand. The PE ratio is expressed in years, which can be translated as the number of years it will take for the profits to cover the purchase price.

Because it shows how much an investor is willing to pay for a dollar in earnings, the PE ratio is commonly referred to as the “multiple.” In the denominator, PE ratios are frequently calculated using estimates of next year’s earnings per share.

Price / earnings ratio = (Price per share) / (Earnings per share)

## Price-Book Value (PB)

Due to frequent fluctuations in the value of income statement components, P / E and other multiples derived from them may be volatile. You can work around this problem by using a price multiple based on a balance sheet measure, such as book value of equity. The current share price of all outstanding shares is used to calculate the market value (that is, the price that the market believes the company is worth). Book value is the amount that is left over after the business has liquidated all of its assets and paid off all of its debts.

## Debt ratio (DE)

The debt ratio compares a company’s total debt to its total equity. A high debt ratio is unfavorable to equity investors because it indicates a high level of risk. It describes the relationship between the number of assets financed by creditors and the amount financed by shareholders. The debt-to-equity ratio is also called the “external-internal equity ratio” because it expresses the link between external equity (liabilities) and internal equity (equity). Financing by creditors (bank loans) is more important than financing by investors when the debt ratio is higher.

## Return on equity (ROE)

The RoE ratio is a measure of a company’s rate of return on its stocks, as the name suggests. In other words, it informs investors about the company’s ability to generate profit through investments in stocks. Return on equity (ROE) is a measure of how much a company uses its equity – or money donated by its shareholders along with accumulated retained earnings – to generate income. In other words, a company’s ability to convert equity into net income is measured by its return on equity (ROE). Return on investment (ROI) is a measure that measures both profit and efficiency. A growing ROE indicates that a business is generating more profit while using less capital. It also shows how successfully the management of a company manages shareholders’ funds.

Return on equity = (Net income) / (Average equity)

## Dividend yield

The dividend yield, also known as the dividend-to-price ratio, is the amount of money or dividend paid to shareholders in a year divided by the current stock price. It is a predictor of how much money you will make. A share’s dividend yield is calculated by dividing the company’s annual cash dividend per share by the current share price in annual percentages.

Dividend yield = (Dividend per share) / (Price per share) * 100

## Current ratio

This reflects the company’s liquidity position or its ability to meet its short-term obligations with short-term assets. A higher number indicates that working capital issues will not hamper the day-to-day operations of the business. A current ratio of less than one is problematic.

The weight of the total current assets in relation to the total current liabilities is taken into account in this ratio. It shows the financial health of a business and how it can make the most of its current assets to pay off debts and debts.

Current Ratio = Current Assets / Current Liabilities