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.
Conclusion
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
What do I do with this information?
Continue to educate yourself by joining our mailing list and receive free content along the way. For those who would like to take action, we have premium (paid) products and services. The stock market and the economy itself is in a period of indecision. With the stock market and the general economy at crossroads, it is time to get educated so that you are ready for the next opportunity and/mitigate against the next potential dip in the stock market.
That’s all for now.
Happy trading and investing,
Your fellow Stock Hackers,
🍒Cherry & Erwin
P.S. The market dropped almost 20% between January and June this year. This may continue into the end of the year. Will the market crash? What should you do if it does crash? We unpack all of these questions in our latest FREE report, “What to do if the Market Crashes in 2022.” Download your free copy now!
