What are the most important ratios when I buy a stock?

What are the most important ratios when I buy a stock?

When buying a stock, it's essential to focus on various financial ratios to ensure a sound investment. Several ratios are crucial, but here are some of the most important ones:

Top 5 Ratios:

1. Price-to-Earnings (P/E) Ratio: This ratio indicates the price investors are willing to pay for a dollar of earnings. A low P/E can suggest that a stock is undervalued, while a high P/E might indicate overvaluation. It’s a useful starting point for assessing whether a stock's price is justified based on its earnings.

- Lower P/E indicates undervaluation.

- Higher P/E indicates overvaluation.

2. Price-to-Book (P/B) Ratio: Compares stock price to book value.

- Lower P/B indicates undervaluation.

- Higher P/B indicates overvaluation.

3. Dividend Yield: Measures dividend income relative to stock price.

- Higher yield indicates attractive income potential.

4. Return on Equity (ROE): This metric measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. Higher ROE values are generally more favorable, as they indicate effective management and strong financial performance.

- Higher ROE indicates strong profitability.

5. Debt-to-Equity (D/E) Ratio: This ratio evaluates a company's financial leverage by comparing its total liabilities to shareholders' equity. A lower D/E indicates a healthier balance sheet, suggesting the company is utilizing less debt to fuel growth, which can be beneficial, especially in volatile markets.

- Lower D/E indicates a healthier balance sheet.

Additional Key Ratios:

· Current Ratio: Measures liquidity (current assets/liabilities).

· Interest Coverage Ratio: Evaluates ability to pay interest expenses.

· Gross Margin Ratio: Measures profitability (gross profit/revenue).

· Operating Margin Ratio: Measures operating efficiency (operating income/revenue).

· Earnings Per Share (EPS) Growth Rate: Measures earnings growth.

Industry-Specific Ratios:

· Price-to-Sales (P/S) Ratio: Relevant for growth stocks.

· Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: Relevant for mature companies.

What to Look for:

Ø Reasonable valuation (P/E, P/B)