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Metrics To Analyse Stocks!

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Avinash garg
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48 views14 pages

Metrics To Analyse Stocks!

Uploaded by

Avinash garg
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Key Metrics to

ANALYZE STOCKS
Investing in stocks requires a deep
understanding of the company’s
financial health, profitability, and growth
prospects.

While there are countless metrics


available, focusing on the right ones can
help you make informed decisions.

Here's a guide to the most critical


metrics:
01 Earnings Per Share (EPS)

Definition: EPS is the portion of a


company’s profit allocated to each
outstanding share of common stock.

Formula:

Net Income - Preferred Dividends


EPS =
Average Outstanding Shares

Why It’s Important: A higher EPS indicates


better profitability and is often used as a
benchmark for comparing companies in
the same industry.
02 Price-to-Earnings Ratio
(P/E Ratio)
Definition: Compares a company’s stock
price to its earnings per share.

Formula:

Market Price per Share


P/E =
EPS

Why It’s Important: It reflects how much


investors are willing to pay for Rs. 1 of
earnings. A high P/E may indicate
overvaluation, while a low P/E could
suggest undervaluation.
03 Return on Equity (ROE)
Definition: Measures how effectively a
company uses shareholders' equity to
generate profit.

Formula:

ROE = Net Income


Shareholders' Equity

Why It’s Important: A higher ROE indicates


efficient use of investor funds. It’s
particularly useful for comparing
companies within the same industry.
04 Debt-to-Equity Ratio
(D/E Ratio)
Definition: Compares a company’s total
liabilities to its shareholder equity.

Formula:

Total Debt
D/E =
Total Equity

Why It’s Important: A low D/E ratio signifies


financial stability, while a high ratio may
indicate excessive debt and higher
financial risk.
05 Free Cash Flow (FCF)
Definition: Represents the cash a company
generates after accounting for cash
outflows to support operations and capital
expenditures.

Formula:

Operating Cash Flow -


FCF =
Capital Expenditures

Why It’s Important: Positive FCF shows that


a company has enough liquidity to pay
dividends, reinvest in the business, or
reduce debt.
06 Price-to-Book Ratio
(P/B Ratio)
Definition: Compares a company’s market
value to its book value.

Formula:

Market Price per Share


P/B =
Book Value per Share

Why It’s Important: A P/B ratio below 1


suggests the stock might be undervalued,
while a ratio above 1 indicates
overvaluation.
07 Dividend Yield

Definition: Shows how much a company


pays out in dividends relative to its stock
price.

Formula:

Dividend Annual Dividend per Share


=
Yield Price per Share

Why It’s Important: Useful for investors


looking for steady income, a higher yield
may indicate a good income source but
could also signal financial strain if
unsustainable.
08 Operating Margin

Definition: Indicates how efficiently a


company is running its operations.

Formula:

Operating Operating Income


= × 100
Margin Revenue

Why It’s Important: A higher operating


margin means better cost management
and profitability.
09 Current Ratio

Definition: Measures a company’s ability to


pay short-term obligations.

Formula:

Current Current Assets


=
Ratio Current Liabilities

Why It’s Important: A ratio above 1


indicates good short-term liquidity, while a
ratio below 1 could signal financial trouble.
10 PEG Ratio (Price/Earnings
to Growth)
Definition: Adjusts the P/E ratio for the
company’s earnings growth rate.

Formula:

P/E Ratio
PEG Ratio =
Annual EPS Growth

Why It’s Important: A PEG ratio below 1 may


indicate undervaluation when factoring in
growth potential.
Conclusion
These metrics provide a comprehensive
snapshot of a company’s financial
health, operational efficiency, and
growth potential.

While no single metric can tell the whole


story, combining them allows for a well-
rounded analysis.

Consider industry standards and the


broader economic context when
interpreting these numbers.

Would you like me to expand on any


specific section or add practical
examples for these metrics?

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