- Profitability Ratio:
Shows whether the stock can give profit in the future.
Return on equity = Net profit / shareholder equity
Net profit we can get in the P/L statement & the latter one from balance sheet.
High ROE = Business constantly generating good profits and giving back to investors
It depends on Sector, always check the average for the particular sector.
Ex: Infra stocks have lots of debt so ROE can be inflated, the
Manufacturing companies might have low EPS compare to an IT stock.
Manufacturing giants reinvest the profit, build a new plant and those new plants take few years to generate profits.
Whereas, IT stocks pay out hefty dividends so have high EPS.
This is percentage of profit of a company produced from its total revenue.
Net profit after tax / total revenue
Ex: 100 is total revenue and after tax the profit is 10Rs.
Which means the profit margin is 10%. For every 100 revenue, profit is 10 rs.
Search for stocks with increasing net profit margin in comparison to the peers of that sector.
Kind of a performance ratio.
EBIDTA / total revenue
The profit here is before EBITDA (Earning Before Interest, Tax, Depreciation and Amortization)
Tell us how much a company is spending in operating cost, raw materials, wages, etc.
Used to measure whether a company can repay the loan back or not.
Means if the company is generating enough cashflow to pay the debts or not.
Total Debt / total shareholders equity
Ex: if debt is more than equity, then slim chances of loan payback, avoid such stocks.
Lower the ratio, better it is.
In some exceptional cases, some organizations take loans to gain tax benefits/exemptions.
Little bit of debt is ok in some cases like Infra as they need huge money upfront.
Always compare the ratio within the same sector.
For ex: IT firms have lower debt ratio as they don't need to take loans for starting a new project,
unlike Infra.
A company with very large current earnings beyond the amount required to make interest payments on its debt has a larger financial cushion against a temporary downturn in revenues. A company barely able to meet its interest obligations with current earnings is in a very precarious financial position, as even a slight, temporary dip in revenue may render it financially insolvent.
EBIT/Interest Expense
EBIT = Earnings before Interest and Tax
Below 1 is considered bad. Higher the better.
Ex: EBIT = 100
Interest amount = 20
So, the ratio would be 100/20 = 5
It means that the company can pay its interest payments 5 times with its operating profit.
- Price to Earning Ratio (P/E)
: Price per share / Earning per share
This is a Valuation ratio.
Talks about companies market value.
Ex: If stock price is 100 rs and EPS is 10 Rs.
So, 100/10 = 10
Means people are ready to pay 10 times (premium) more for the stock.
Myth: That high PE ratio is bad and overvalued, its wrong.
Always compare the PE ratio with the industry (sector PE).
Ex: FMCG company like HUL has higher PE comparing to others.
Generally, MOAT companies have Higher PE ratio.
- Price to Book Ratio (P/B)
: Price per share / Book value per share
Book value per share = Total shareholders equity / Total number of outstanding shares in the market.
If Book value = 100, and Price = 100.
Therefore, P/B ratio = 1
Why to look at this ?
This is important for Money lending companies like banking, etc.
Here, assets and liabilities comes into picture.
The P/B ratio draws a relationship between the market capitalisation of an organisation and the value of assets it possesses.
Conventionally, a PB ratio of below 1.0, is considered indicative of an undervalued stock. Some value investors and financial analysts also consider any value under 3.0 as a good PB ratio
Websites to check the above ratios / fundamental analysis:
https://www.tickertape.in/
https://trendlyne.com/
moneycontrol.com
