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Financial Ratio

What are Financial ratios

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization.
There are mainly three parameters for stock market analysis such as balance sheet, Cash flow statement and financial ratios.
It is widely believed that analysing ratios are difficult or tricky but I can promise you after reading this article you will find financial ratios more understandable compare to the other two.
9 most important ratios that matter while buying a stock
  1. PE ratio =Share price/earning per share, what the market is willing to pay for a stock based on its past or future earning. In other words how many years will it take to recover the initial investment amount in the stock, for example, the stock is of 100 rs and PE is 10 that means it will take 10 years to recover the initial investment of 100 rupees. Hence Lower the PE ratio cheaper the stock. 
  2. PEG ratio=P.E/Expected earnings growth in %, It indicates the relationship between a company's market value and its projected earnings growth. Since the ratio tries to correct a limitation of PE ratio, It can be used across sectors. PEG below 1 means a stock is undervalued while over 1 is overvalued 
  3. P/CF=Share price/cash flow per share(CFPS), It compares a company's market value to its cash flows. Since non-cash flow expenses like depreciation, amortisation etc are excluded, This is a more stable valuation indicator than earnings. that means low P/CF is good and vice versa.
  4. EV/Ebitda=Enterprise value(EV)/Earning before Interest, Tax, Depreciation and amortisation. This ratio shows us whether the company is over-leveraged or not it is very useful for comparing companies which have high debt upon them, Hence lower is better.
  5. PB=Share price/Book value per share(BVPS),  Compares companies current market price to its book value. Low PB means the stock is cheap and it is a good time to invest in this particular stock. 
  6. Dividend yield=Dividend per share(DPS)/Share price, this shows us how much dividend an investor will receive as the % of the current market price, Hence higher is better. For example, power grid corp has 4.56 of dividend yield and its share price is 171.5 then it means that an investor might earn a 7 rs of dividend per share. It only provides a rough idea because the decision for declaring dividend depends upon the CEO of an enterprise and it can fluctuate.
  7. Market Cap/Sales=Market cap/Sales or revenues, How much an investor needs to pay for the stock's revenue. Hence lower is good, Why sale or revenue you ask because tampering with them is next is impossible in the current market dynamics.
  8. EV/Sales = Enterprise value/Revenue, The same rationale is used in this ratio as well, This ratio compares the total value of the company to its sales. Hence lower is good.
  9. EV/Capacity=Enterprise value/Total capacity,   This measures how much you need to pay per unit. This ratio is used by acquirers but can be used by retail investors too.
These are some simple ratios that will help you in finding the best stocks in the market but there's a catch these ratios are not recommended for intraday trading because intraday trading has many aspects for fluctuation in the change of its share price, But the most significant factor is the news and how people and coders feel about that news.
Apart from that These ratios are helpful for swing trading and long term trading or investing.
Ratios segment is widely used by long term investors because they have patience and experience and that's the reason why long term bets have always given huge returns.
If you think calculating these ratios will take to much time then you can easily find them on money control app under ratios column.
You also find the undervalued stock which is paying the high dividend and whose growth rate is increasing. Once you have set the parameters for the stocks you can invest in them and remove them simultaneously when they cross the threshold. It will take to much time and energy to analyze all the stocks in the market and then invest in those particular stocks who fulfil the above condition is like finding a needle in the field of grass. But don't worry the screener is a website that helps you customize your watchlist.   


Thank you.
            
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