Key Financial Ratios for Investing (2024)

Fundamental analysis involves evaluating the financial health and performance of a company to determine its intrinsic value and potential as an investment. There are various financial ratios that analysts use to assess a stock. Here are some important ones along with their ideal values, although it's essential to keep in mind that these values can vary across industries:

• Price-to-Earnings (P/E) Ratio: The P/E ratio compares the stock's current price to its earnings per share (EPS). A lower P/E ratio indicates that the stock may be undervalued.
• Ideal value: There is no fixed "ideal" P/E ratio, as it depends on the industry and the company's growth prospects. Generally, lower P/E ratios are preferred for value investments, while higher P/E ratios might be acceptable for growth-oriented companies.

• Price-to-Book (P/B) Ratio: The P/B ratio compares the stock's market price to its book value (net asset value per share). A lower P/B ratio may suggest that the stock is undervalued.
• Ideal value: Similar to the P/E ratio, there is no universal ideal P/B ratio. Companies with P/B ratios below 1 could be considered undervalued, but it's essential to compare it with industry peers.

• Debt-to-Equity (D/E) Ratio: The D/E ratio measures a company's financial leverage by comparing its total debt to shareholders' equity. A lower D/E ratio indicates a less leveraged and potentially more stable company.
• Ideal value: Generally, a lower D/E ratio (around 0.5 to 1) is considered better, but this can vary depending on the industry. Some industries, like utilities, might have higher D/E ratios due to the nature of their business.

• Current Ratio: The current ratio compares a company's current assets to its current liabilities. It shows the company's ability to meet its short-term obligations.
• Ideal value: A current ratio above 1 is generally considered acceptable, but a ratio between 1.5 to 3 is often viewed as healthy, as it indicates the company can cover its short-term liabilities comfortably.

• Return on Equity (ROE): ROE measures a company's profitability in relation to shareholders' equity. It indicates how efficiently a company generates profits from shareholders' investments.
• Ideal value: A higher ROE is generally preferred, with values above 15-20% often considered good, but this can vary based on the industry and the company's growth prospects.

• Dividend Yield: The dividend yield is the annual dividend per share divided by the stock's current price, expressed as a percentage.
• Ideal value: The ideal dividend yield depends on the investor's objectives. Some investors seek high yields for income, while others might prefer growth-oriented companies with lower yields.

Remember that these ratios are just one part of the overall fundamental analysis. It's crucial to consider them alongside other factors such as company financials, industry trends, management quality, competitive advantages, and overall market conditions before making investment decisions. Additionally, different industries may have different norms for these ratios, so it's essential to compare them within their sector or peer group.