Most Important Ratios and Metrics for Stock Analysis

Analyzing stocks requires focusing on a mix of profitability, valuation, growth, solvency, and efficiency metrics. Here are the most essential ratios and metrics every investor should know:

1. Profitability Ratios

· Earnings Per Share (EPS):

· Shows profit attributable to each outstanding share.

· Higher EPS generally signals greater profitability.

· Net Profit Margin:

· Net income divided by revenue.

· Indicates how much profit a company makes for each dollar of sales.

· Return on Equity (ROE):

· Net income divided by shareholders` equity.

· Measures how efficiently management is using investors’ funds to generate profit.

· Return on Assets (ROA):

· Net income divided by total assets.

· Reveals how well assets are used to produce earnings.

2. Valuation Ratios

· Price-to-Earnings (P/E) Ratio:

· Stock price divided by EPS.

· Compares market value to earnings; lower can mean better value, depending on industry norms.

· Price-to-Book (P/B) Ratio:

· Stock price divided by book value per share.

· Assesses whether a stock is undervalued or overvalued relative to its net assets.

· Price-to-Sales (P/S) Ratio:

· Market capitalization divided by annual revenue.

· Useful for evaluating companies with no profits.

3. Growth Metrics

· Revenue Growth Rate:

· Year-over-year percentage increase in sales.

· Indicates if the company’s core business is expanding.

· Earnings Growth Rate:

· Year-over-year or projected future EPS growth.

· Shows profitability momentum.

4. Solvency and Leverage Ratios

· Debt-to-Equity (D/E) Ratio:

· Total debt divided by shareholders` equity.

· Indicates financial leverage and capital structure risk.

· Current Ratio:

· Current assets divided by current liabilities.

· Measures ability to pay short-term obligations (liquidity).

· Interest Coverage Ratio:

· EBIT (Earnings Before Interest and Taxes) divided by interest expenses.

· Shows how comfortably a company can service its debts.

5. Efficiency Ratios

· Asset Turnover Ratio:

· Revenue divided by total assets.

· Measures efficiency in using assets to generate sales.

· Inventory Turnover Ratio:

· Cost of goods sold divided by average inventory.

· Indicates how quickly inventory is sold and replaced.

6. Dividend Metrics

· Dividend Yield:

· Annual dividend per share divided by share price.

· Reflects return on investment from dividends.

· Dividend Payout Ratio:

· Dividends paid divided by net income.

· Shows the portion of earnings distributed to shareholders.

These ratios, analyzed together and compared against industry peers, provide a comprehensive picture of a company’s financial health, market valuation, and investment potential.