Financial ratios are used by investors and traders to determine a companies financial standing in regards to different numbers. This is especially key for value investing purposes in determining a companies profitability, and how well they are fairing in terms of their stock price in comparison with other financial figures.
Key Financial Ratios and What They Mean.
The three key financial ratios we are going to discuss today are the Price-to-Earnings (P/E), Debt-to-Equity (D/E), and Return-on-Equity (ROE) ratios.
The Price-to-Earnings ratio is used by traders and investors to determine potential growth of a company. It defines how much an investor is willing to pay for a stock for each $1 of earnings they generate. A company with no or negative earnings will not have a P/E ratio.
The Debt-to-Equity ratio is how much of a companies operations is funded by debt. This is important to investors because it indicates if a company would be able to cover all their debts with their shareholders equity. It gives a good insight on how risky (or not) an investment in that company is.
The Return-on-Equity ratio is how a company uses shareholder money to improve their poftiability. The higher a companies ROE the better they are at generating profits because of shareholders contributions which can be a good sign to invest in them.
Note about Financial Ratios
Financial ratios can be a strong tool for investors to use when determining whether to enter a position within a specific company. It is important to note however, that a good ratio is subjective to a specific trader, investor or even the sector a company is in. There is no “one size fits all” number for a good ratio.
Financial ratios are sometimes an overlooked portion of fundamental analysis and building conviction on entering a certain investment. Adding them to your trading plan is a great idea and can help you immensley! Stay safe and keep learning.
Your Fellow Stock Hackers
Erwin and Cherry
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Your fellow Stock Hackers,
🍒Cherry & Erwin
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