▪︎Most Widely Used Metric
▪︎High P/E ratio means either the company is overvalued or is on a trajectory to growth
▪︎Low P/E ratio indicates either the company is undervalued or soon the profits will disappear.
Here are all the Financial Ratios you will need to evaluate a company -
Financial Ratios Covered ⬇️
- P/E
- P/B
- Current Ratio
- Quick Ratio
- ROCE
- ROE
- D/E
- P/S
- PEG
- Price-to-Cash Flow (P/CF)
⚡ & many more 😄
Here is the Thread🧵⬇️
▪︎Most Widely Used Metric
▪︎High P/E ratio means either the company is overvalued or is on a trajectory to growth
▪︎Low P/E ratio indicates either the company is undervalued or soon the profits will disappear.
Book Value = Total Assets - Total Liabilities
▪︎It's useful to evaluate companies with large tangible assets in their balance sheets.
▪︎It's a good Metric to Evaluate Bank Stocks but less useful for Service & IT Stocks.
= Current Assets/Current Liabilities
▪︎A higher ratio often indicates greater liquidity and more stability.
▪︎It helps us gauge the short-term financial strength of a company.
▪︎The current ratio gives an idea of a company’s operating cycle.
▪︎A Liquidity crisis can arive even at healthy companies that's why I prefer Quick Ratio over Current Ratio because it's more conservative.
▪︎It excludes inventory & other current assets, which are generally more difficult to turn into cash.
▪︎ROCE tells you the amount of profit a company is generating per $1 of capital employed.
▪︎Capital Employed = Total Assets - Current Liabilities or Equity+long-term debts
▪︎ROCE should be equal to at least twice current interest rate
▪︎ROE tells you how efficient a company using its shareholders equity to generate profits.
It can be manipulated by having excessive debt on the balance sheet that's why it becomes extremely important to check a Company's ROCE & ROE simultaneously.
▪︎A high D/E ratio is often associated with high risk; it means that a company has been aggressive in financing its growth with debt.
▪︎ Note, In the banking and financial services sector, a relatively high D/E ratio is commonplace.
▪︎The Ratio is effective in valuing growth stock that have yet to make a profit.
▪︎If the P/S ratio is lower than comparable companies in the same industry that is profitable, investors might consider buying the stock due to the low valuation.
▪︎Diluted EPS is more effective than basic EPS because it includes the impact of all potential equity diluters.
▪︎Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options, & warrants.
▪︎Dividend Yield depends on the stock price & payout ratio.
▪︎It gives you an idea about company’s growth stage.
▪︎Higher Dividend Yield could be a result of declining stock price that shows Investors or market is not sure about company’s future.
▪︎The PEG ratio enhances the P/E ratio by adding in expected earnings growth into the calculation.
▪︎It's extremely useful to evaluate growth companies that usually trades at Higher P/E ratio.
▪︎Companies which have higher operating profit margins are more well-equipped for paying for fixed costs & interest on obligations, thus they have better chances for surviving an economic slowdown.
▪︎Also it tells about the competitive landscape
▪︎The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales.
▪︎Comparisons are only meaningful when they are made for different companies within the same sector.
▪︎P/CF is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.
- The greatest example is Amazon.
Company didn't earn profit for many years but still was a Cash Cow.
