considering investing in a company. Which financial ratios would you find most useful? Why?
The ratios I look at are:
long term debt to share equity
liabilities to assets
EPS to stock price
Here are many more.
http://www.investopedia.com/university/ratios/
When evaluating a company for investment purposes, there are several financial ratios that can provide useful insights into its financial health and performance. Here are some of the most commonly used financial ratios, along with their explanations and why they are considered useful:
1. Price-to-Earnings (P/E) Ratio: The P/E ratio compares a company's stock price to its earnings per share (EPS). It helps investors understand how much they are paying for each dollar of earnings generated by the company. A lower P/E ratio might suggest that a company's stock is undervalued, although it should be considered along with other factors.
2. Return on Equity (ROE): ROE measures a company's profitability relative to the shareholders' equity invested in the business. It indicates how effectively the company is utilizing the funds provided by shareholders. A higher ROE indicates greater profitability and efficiency.
3. Debt-to-Equity Ratio: This ratio compares a company's debt to its shareholders' equity. It measures the proportion of a company's capital structure that is financed by debt versus equity. A lower debt-to-equity ratio generally indicates lower financial risk and better financial stability.
4. Current Ratio: The current ratio assesses a company's liquidity by comparing its current assets to its current liabilities. It helps determine if a company has enough short-term assets to cover its short-term obligations. A ratio above 1 indicates a company has enough current assets to meet its short-term liabilities.
5. Gross and Net Profit Margins: These ratios measure a company's profitability by examining its gross and net profit as a percentage of revenue, respectively. Higher profit margins imply better profitability and efficiency in managing costs.
6. Dividend Yield: Dividend yield represents the annual dividend per share divided by the stock price, indicating the return on investment through dividends. It is particularly useful for income-seeking investors who prioritize regular income.
These ratios provide various perspectives on a company's financial well-being, profitability, efficiency, and ability to meet its financial obligations. It is essential to analyze them in conjunction with industry benchmarks, historical trends, and other relevant factors to form a well-rounded assessment and make informed investment decisions.