 Important Ratios

# 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 