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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