For investors looking to invest in stock markets, the best way to start is to understand the basics correctly
Price to Earnings Ratio: It is the most common measure of how expensive a stock is. The P/E ratio is equal to a stock’s market capitalisation divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period.
PEG Ratio: A stock’s price/earnings ratio divided by its year-over-year earnings growth rate. When evaluating a stock, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth.
Current Ratio: The value of current assets divided by current liabilities. The current ratio measures a company’s ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is.
Quick Ratio: This is a measure of a company’s liquidity and ability to meet its obligations. Quick ratio, often referred to as acid test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities.
Profit Margin: Net profit after taxes divided by sales for a given 12-month period, expressed as a percentage.
Return on Capital Employed (ROCE): This is a measure of the returns that a company is realising from its capital. This ratio represents the efficiency with which capital is being utilised to generate revenue.
Return on Equity (ROE): A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year’s after-tax income (after preferred stock dividends but before common stock dividends) divided by book value, expressed as a percentage.
Debt to Equity Ratio: This is a measure of a company’s financial leverage. Investing in a company with a higher debt to equity ratio may be riskier, especially in times of rising interest rates, due to the additional interest that has to be paid out for the debt.