Stock Market Metrics: Financial Ratios Every Investors Must Know To Analyse Companies Like A Pro – News18
Last Updated:
The stock market is not just luck; seasoned investors use financial metrics like P/E, P/B, EV/EBITDA, Net Profit Margin, Operating Profit Margin, ROE, ROA, EPS, and FCF to make informed decisions.
Financial ratios every investor must know.
Stock Market Metrics: From the outside, the stock market can appear to be a gamble, seemingly favouring luck and chance over mental strategy and planning. Many novice investors, aiming for quick gains, often fail to understand the market’s complexities and lose a significant portion of their investment.
What differentiates a seasoned investor from a novice? How do these adept investors amass considerable wealth while others struggle to even maintain their principal amount?
Is the stock market truly a game of luck or one of skill?
The stock market is not simply a game of chance where one bets on stocks hoping for profits. Ace investors delve deeper, seeking to understand the financials of the companies in which they invest.
Several financial metrics help assess a company’s performance, profitability, and valuation. These are the factors adept investors analyse before making investment decisions.
Let’s explore some of these useful metrics used to evaluate various aspects of companies.
Price-to-Earnings Ratio (P/E) – This compares a company’s stock price to its earnings per share (EPS) to determine if it is overvalued or undervalued.
Price-to-Book Ratio (P/B) – This measures stock price relative to the company’s book value (assets minus liabilities).
Enterprise Value to EBITDA (EV/EBITDA) – This helps evaluate a company’s total value, including debt, compared to its earnings before interest, taxes, depreciation, and amortisation.
Net Profit Margin – This shows how much profit a company generates after all expenses, including taxes and interest.
Operating Profit Margin – This measures how much of the revenue turns into profit after operating expenses.
Return on Equity (ROE) – This shows how efficiently a company generates profit from shareholders’ equity.
Return on Assets (ROA) – This measures how efficiently a company utilises its assets to generate earnings.
Earnings Per Share (EPS) – This shows the company’s profit allocated per share.
Free Cash Flow (FCF) – This is the cash available after operational expenses and capital expenditures, critical for growth and dividends.
