Knowing key fundamental ratios before investing in any stock is like stepping into a pool of wealth and knowing the depth. Fundametals play a pivotal role while investing in any stock. The basic objective of fundamentals is to figure out which stock is superior in all aspects.
So, let us look at 8 key fundamental ratios
P/E Ratio
The P/E ratio determines Price to earnings ratio which is used to calculate the current market price of a share to its earnings per share.
P/E ratio = Market price per share / Earnings per share (EPS)
For example, a company’s share is trading at 100rs, and let us consider its EPS as 10. Then the calculated P/E would be 10.
Let’s see how the stock is doing in real time. There is 25.20 P/E ratio on Reliance stock. That means that the share price is 25.20 higher than the earnings per share.
The ideal P/E of a company ranges from 10-20 depending upon the sector and its market cap.
P/B Ratio
The P/B ratio determines the price-to-book ratio which is used to calculate the current market price of a share to its book value.
P/B ratio = Market price per share / Book value per share
For example, a company’s share is trading at 100rs, and let us consider its book value as 100rs. Then the calculated P/B would be 1.
Real time example
ITC has a P/B ratio of 6.56. That means it is 6.56 higher than its actual book value
A high P/B determines overvalued and a low P/B ratio determines less valued.
ROE
ROE (Return on Equity) is a ratio that is used to measure the profitability of a company to its shareholder’s equity. It can be quite helpful to analyze effectively whether the company is able to create wealth from its business operations.
ROE = Net income / Shareholders Equity
Here
- Net income is a company’s total revenue minus its expenses, including taxes.
- The value of shareholders’ equity comes from subtracting a company’s liabilities from its assets. As a result of liquidating all the assets and paying off all the debts of a company, it represents the amount of money that would remain for shareholders.
EPS
Earning per share is used for the purpose of measuring the company’s profit per share compared to the total outstanding shares of its common stock.
EPS = Net Income / Number of Outstanding Shares
Here
- Net income is a company’s total revenue minus its expenses, including taxes.
- The number of outstanding shares is the number of shares of common stock that are currently held by investors.
BOOK VALUE
Book Value is a benchmark used to measure the company’s value of assets minus liabilities.
Book Value = Total Assets – Total Liabilities
Here
- Here assets comprises both current assets and non current assets.
- Total assets are the sum of all the assets a company owns, such as cash, investments, property, equipment, and inventory.
- Total liabilities are the sum of all the debts and obligations a company owes, such as loans, mortgages, accounts payable, and taxes owed.
DEBT TO EQUITY
Debt to Equity ratio measures the total debt taken by a company to its share holders equity. with this formula, one easily measures the company debt and leverage taken.
In simple terms, the amount of money that company shareholders would get if the company liquidated and paid off all the liabilities.
D/E ratio = Total Debt / Shareholders’ Equity
Here
- Here the debt includes all the liabilities company owes, short term debt, and long-term debt.
- Shareholders’ equity is the total value of a company’s assets minus its liabilities.
MARKET CAP
Market cap is the most widely used ratio to get a basic understanding of a company by figuring out the company’s size and its worth
Market Cap = Number of Outstanding Shares x Market Price per Share
It is very simple to understand this ratio.
Market cap symbolizes the company’s worth and determines which valuation it suits( Like large cap or midcap or small cap) and how large the company is in its shareholding. it is quite evident large-cap companies have more revenue than small-cap companies.
FACE VALUE
Face value differs for stocks, bonds, and others. But in this blog, we shall only look at stock face value.
The face value of a stock determines the initial value os stock assigned to the stock at the time of issuance. Generally, the face value of the company sits below or equal to 10 rupees.
Here
- Market value differs to face value
- The face value will not fluctuate like market value.
These are the 8 key fundamental ratios
