1. RETURN ON EQUITY ( ROE )
One of the most important ratios to understand is return on equity, or the return a company generates on its shareholders capital.
In one sense, its a measure of how good a company is at turning its shareholder's money into more money.
If you have two companies that each earned 10 crore. this year but one company invested 100 crore. two generate those earning while the other only need 50 crores., it be clear that the second company had a better business that year.
A firm with ROE of 10% means that they generate a profit of rupees 10 for every Rs 100 of equity its own.
2. DEBT-TO - CAPITAL RATIO
In addition to tracking a company profitability, you'll also want to understand how the business is financed and whether it can support the level of debt it has.
One way to look at this is the debt- to - capital ratio which adds short- and - long term debt and divides it by the company total capital.
The higher the ratio is the more a company is indebted.
3. INTEREST COVERAGE RATIO (ICR)
Interest coverage can be calculated by taking earning before interest and taxes or EBIT and dividing by interest expenses.
This number tell you the extent to which earning cover interest payment owned to bank bondholders. The higher the ratio the more coverage the company has for its debt payment.
Remember though that earning don't always stay the same. A cyclical company operating near a peak might show great interest coverage due to its elevated earning but that can evporate when earning fall.
4. ENTERPRISE VALUE EBIT :
The enterprise value to EBIT ratio is a essential a more advanced version of the P/E ratio.
Both ratio are a way for investor to measure how much value they're getting compared to what they're paying.
But using enterprise value instead of the share price allow us to incorporate any debt financing used by the company.
5. EARNING PER SHARE:
Earning per share or EPS is one of the most common ratio used in the financial world.
This number tell you how much a company and in profit for each outstanding share of stock.
EPS is a calculated by dividing a company net income by the total number of shares outstanding.
Like other financial Matrix earning per share is the most valuable when compared against competitors Matrix companies of the same industry or across the period of time.
6. PRICE / EARNING RATIO ( P/E ):
Another com ratio is the P/E ratio which takes a company stock price and divide it by earning per share.
This is a valuation ratio meaning it's used by investor to determinine how much value they're getting relative to what they are paying for a share of stock.
One of the world most successful investor Warren buffet has made a fortune buying shares in business with solid growth prospect that trade at low P/E ratio.
7. OPERATING MARGIN :
Operating margin is a way of measuring the profitability of a business core operation. Its calculated by dividing operation profit by total revenue and show how much income is generated by each rupee of sales.
Operative income Tax revenue and subtract the cost of sales and all operating expenses such as employee and marketing cost.
Calculating and operating margin can help you compare with other business without having to make adjustment for difference in debt financing or tex rates.
8. QUICK RATIO :
The quick ratio measures whether a company can meet it short term obligation with asset that can quickly be converted into cash.
The ratio is useful for analyzing company facing financial difficulties or during economic downturn when profit may be hard to come by.
If the ratio is one or less the company may need to rise additional funds from investor or hope to see an improvement in its business quickly.
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