Important Ratios

As per readers input, we are publishing the important ratios we use here with examples.  Please check back for updations.

EPS

Earnings per share.  It is the Net Profit divided by Number of Shares.

Example: If your company earned 200 rs. profit and there is 100 shares outstanding.  The EPS is 200 / 100  = 2

Inference: Higher the better; More growth the better.

PE Ratio

Price to Earnings Ratio. This is derived from EPS and CMP (Current Market Price).

As you know CMP is the market given value to the share.

PE = CMP / EPS

If the above company is trading at 100 rs, then PE = 100 / 2 = 50.

If the above company is trading at 200 rs, then PE = 200 / 2 = 100.

So we should try to find low-pe stocks.

Inference: Lower the better;

Book Value

This is the value of the share on books. That means, the price you are going to get if the company liquidates today & trading is stopped on this stock.

PB Ratio

Price to Book Value Ratio.  This is the CMP to Book Value Comparison.

Example Book Value is 25 for the above stock & CMP is 100. Then PB Ratio is 100 / 25 = 4.

Inference: Lower the better;

In value investing, we do not prefer stocks having high PB value. Something around 3 is good.  Less than 1 is very good.

Reference

Warren Buffet and the Interpretation of Financial Statements

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