Hello! In this article, we will take a look at the “Financial Ratios of a share ”. Through this article, I will give a glimpse of some important quantities of a Share. In the last article, we have discussed some basic terminologies, Face Value, Market Value, and Book Value of a share. If you haven’t read that article, I would strongly suggest going through that articles before reading this. I have attached the link to the previous articles here. Please check.
The first general and basic quantity to look for is Market cap. Market Cap or Market capitalization refers to the total value of a company’s outstanding shares of stock. It is calculated by multiplying the price of one share by the total number of outstanding shares. It generally helps to differentiate between large-cap companies, medium-cap companies, and small-cap companies.
The next significant ratio is the P/E ratio.
Here, let’s consider the price of a share of a company X is 200 and earning per share cost is 13.
So, Now the P/E ratio is 200/13 (i.e, 15.38). Another company Y of the same share price, and the earring per share is 17. So, Now the P/E ratio is 200/17 (i.e, 11.76).
Here, the share price of the two companies are the same, but they vary in earnings per share(Earning per share typically refers to how much a company makes a net profit from each share of its stock). So, A high P/E ratio means that a stock’s price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.
The next significantly important ratio is Return on Equity(ROE).
Mathematically, ROE = Net Profit / (Company’s Assets -Company’s Liabilities)
More the ROE, better the returns. Again, whenever you are comparing shares of two companies, make sure they are of the same industry.
Last but not the least ratio for today is the dividend yield.
The dividend yield is one more essential parameter to be considered by investors before adding any share to their portfolio. Dividend yield refers to the amount of money a company pays to shareholders for owning a share of its stock divided by its current stock price. Some brokerage platforms show it in percentage form.
So, These ratios are some basic ratios that can be used by any early-stage investor to analyze the share. I hope you enjoyed reading this article.
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