Financial Documents & Important Ratio – Part 2
WE had discussed in our previous blog about some important financial
documents and financial ratio. Some ratio we had discussed in previous article
and rest we will discuss today.
Debt/equity ratio: We can get it dividing long term debt by common shareholder’s equity. A
company with higher debt/equity ratio consider risky. It is good tool to
measure of a company’s leverage.
Dividend payout ratio: It is very important ratio to know. As for long
term investor it is very important to know how much the company dividend paying
from its profit. No matter how much company is earning. It is dividend that
matter to equity investors.
Earning multiple: It is very famous ratio to measure a particular stock is available in
cheap or costly. The earning multiple is equal to stock’s market capitalization
divided by its after tax earning over a period of time. If a blue chip company
is trading with high earning multiple its means the investor are more confident
about the company’s future growth. It is used to measure for how expensive a
stock is available in the market.
Earning per share or EPS : We can get it from total earning divided by the
number of outstanding shares. It is also very important to know that how much company
is earning per share.
Price to book ratio: When we divide a stock’s market capitalization by its book value. We get
price to book ratio. For Value investor it is very important financial ratio. A
low ratio may be good opportunity for value investor. It compares the market’s
valuation of a company to the value of the company according to its financial
statements.
ROA or Return on Assets: It shows
company’s profitability by company’s earning divided by its total assets.
ROC or Return on Capital: It reflects how effectively a company uses its
money invested in the operations. So it is also very important ratio. We can
get it from dividing net operating income after taxes by total asset involved
in operation.
ROCE or Return on Capital Employed: It reflects the efficiency with which capital is
being utilized to generate revenue by company. It is calculated from profit
before interest and taxes divided by the difference between total assets and
current liabilities.
ROE or Return on Equity: It actually reflects that how much profit the
company is able to generate from the resources provided by shareholder.
Investor often tends to the companies which have high ROE with growth.
ROTA or Return on Total Assets: It shows how effectively a company uses its assets.
A company without good ROTA faces difficulty to generate a expected ROE.
Working Capital: We can get it deducting current liabilities from current assets. If
companies that have a lot of working capital will be more successful compare
with those companies which have negative working capital.
Total asset turnover: Net sales divided by total assets shows total asset turnover. It
reflects companies capability of assets using to generate revenue.
There is many more ratio which you can analyse
before invest in the company’s stock. I assume it would be very useful to all
equity investors.
For more detail about any other query related investment, you can contact
me through my email.
Regards,
Arvind Trivedi
Certified Financial Planner
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