Picking a right stock means doing company analysis. It takes a lot of time to evaluate a business. It necessitates carefully examining the financial statements of the company, such as the balance sheet, the profit and loss statement, the cash flow statement, etc. So, here’s a quick way to pick stocks which are good to buy.

Investors have discovered some quick way in the form of financial ratios because it can be challenging to go through all the information on a company’s financial statements.

The existence of these financial ratios makes the life of a stock investor very easy.

Stock market investors can use these ratios to analyse the financials of two companies to determine which one offers a better investment opportunity or to select the ideal companies to invest in.

5 Financial Ratios to pick stocks

  1. Price to Earning ratio – Look for a low PE ratio because a low PE ratio. As, a high PE ratio generally shows that the investor is paying more for the share. This may vary from sector to sector. Formula to calculate PE ratio isPrice to Earnings Ratio= (Price Per Share)/( Earnings Per Share)
  2. Price to Book Ratio PBV ratio is an indication of how much shareholders are paying for the net assets of a company. Low PB ratio could mean that the stock is undervalued. Lower value varies from sector to sector. Formula to calculate PB ratio is                                                                                                              Price to Book Ratio = (Price per Share)/( Book Value per Share)
  3. Return on Equity ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment. Always invest in a company with ROE > 20% for at least last 3 yrs. Formula to calculate ROE isReturn on Equity = (Net Income)/(Average Stockholder Equity)
  4. Debt to Equity ratio Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier as it means that a company is using more liabilities and has a weaker equity position. Companies with a DE ratio of more than 1 are risky. Which means they have more debt than equity. Value may vary from sector to sector. Formula to calculate DE ratio isDebt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)
  5. Current Ratio The current ratio is a key financial ratio for evaluating a company’s liquidity. This ratio tells the company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable. As a thumb rule, always invest in a company with a current ratio greater than 1. Formula to calculate Current ratio is

Current Ratio = (Current Assets)/(Current Liabilities)

You do not need to calculate these ratios by yourself. These are available on company’s website in their financial statements. Evaluate the company carefully before investing because you not want to lose money. If you want personal guidance, on which stocks to buy, contact us at 9460825477.

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