Profitability Ratio – Operating & Net Profit Margin Ratio
Efficiency Ratio – Return on Capital Employed & Return on Equity
Return on Capital Employed (ROCE) and Return on Equity (ROE) or Return on Net Worth (RONW) are used to measure the profitability of a company based on the funds with which the company conducts its business. While each ratio is a metric to measure returns, ROCE measures the overall return and ROE measures the return attributable only to the shareholders.
Current Ratio indicates in percentage terms the working capital (i.e. current assets – current liabilities) with which the company conducts its business operations. Current assets include cash and liquid assets that can be readily converted to cash such as accounts receivable, inventory, marketable securities, prepaid expenses etc. Similarly current liabilities are obligations of a company which are due within one year and include short term debt, accounts payable, accrued liabilities and other debts of similar nature.
Long Term Debt to Equity Ratio
Interest Coverage Ratio
Quantitative Analysis: Key Things to keep in mind when using financial ratios
Price to Book Value Ratio
Price/ Book Value Ratio (P/B ratio) is used to compare the market price of the share to its book value and is calculated by dividing the Market Price per share by Book Value per share. P/B ratio usually works well only for companies which have large assets on their books such as, infrastructure and real estate companies, or companies in other manufacturing sectors – steel, automobiles etc.
Price – Earning Ratio
Discounted Cash Flow Analysis
Discounted Cash flow (“DCF”) Analysis is a widely used model for determining the fairness of stock prices. The goal is to estimate the amounts and dates of expected cash receipts which the company is likely to generate in future and then arriving at the present value of (the sum of) all future cash flows using an appropriate discount rate.
Fundamental Analysis of Stocks
Fundamental analysis of stocks involves a study of the overall financial health of the economy and industry and an examination of business’s financial statements, management quality, its competitive advantages and future prospects. The key to fundamental analysis is in-depth RESEARH of both quantitative and qualitative factors.
Role of Corporate Governance in Investing
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.