Top 5 Important Ratio you must know before Trading

Here are a few important points that will help you to finalize a handful of stocks that will secure your financial future.

But, what if we tell a few important pointers that will help you finalize a handful of stocks that would secure your financial future?

If you are a beginner and want to learn more about stock market course for better understanding and will help you to kickstart your trading or investment journey.

Well then! Without any further ado, let us dive into those pointers that will help us make the right decision regarding investing in the stock market.

1.. Price to Earnings Ratio (P/E Ratio)

P/E ratio

THE Price to Earning Ratio is define as the ratio of the company ‘s share price to its earning per share. In mathematics, the P/E ratio is calculated by dividing the market value of each share of a company by its earnings per share. The P/E ratio is a very useful indicator to assess the relative value of a company’s shares. Know the important pointers regarding the P/E Ratio that you need to consider while selecting this indicator to assess an investment opportunity -

1.. Hight P/E Ratio denotes the stock of the company is overvalued and vice-versa

2.. P/E Ratio is not only not the only way to evaluate the performance of a company's stock.

3.. Having a high P/E ratio also indicates that the company's earnings will grow rapidly in the future.

4.. Before investing in a company, it is crucial to calculate the past P/E ratio.

5.. Debt can be used by companies to manipulate the P/E ratio.

2.. EBITDA Margin

The term "EBITDA" is short for "Earnings Before Interest, Taxes, Depreciation, and Amortization". The EBITDA margin is used to calculate the profitability of a company from its operations. Increased EBITDA margins are an indication that a company is managing its operating costs efficiently. If a company has a high EBITDA margin that means the operating expenses of the company are not eating too much into its revenue.

Formula to calculate EBITDA margin:

EBITDA Margin = (Earnings before tax and interest + Amortization + Depreciation) (the total revenue of the company) X 100

Here are some of the important points of EBITDA Margin that you need to consider beforeinvesting in any company.

• Smaller companies that have better EBITDA margin as compared to larger entities.

• Companies can misuse EBITDA margins to misrepresent the financial performance of their organizations by disregarding debt

• It is not appropriate to use EBITDA margin to evaluate the financial performance of companies with high debt levels.

3..Debt to Equity Ratio (D/E Ratio)

Debt-to-Equity is one of the important parameter that investor must use to asses that much of the company depends on the money borrowed from from its leander. Low D/E ratios indicate that the company will not have problems raising funds in the future.

If the debt-to-equity ratio is high, the company may suffer greatly during hard times.

According to the experts a low D/E Ratio is consider better for business, if seen in isolation, can give a false image to investors. Ideally, one must not invest in those companies that have a debt-to-equity ratio of not more than 2:1.

4..Return on Capital Employed (ROCE)

Return on Capital Employed is the one of the important parameter of companies that investor should look before investing. ROCE is define as the profit percentage earned by a company with respect to the capital Invested". ROCE is the profit amount earned by a company from the capital invested. Both the equity and Debt components are considered in this parameter.

The formula to calculate the "Return on Capital Employed" has been given below -

ROCE = Earnings before Interest and Tax (Total assets - Current liabilities)

5..Return on Equity (RoE)

Return on Equity (RoE)is the major ratio that help investor to calculate that how much return on their investment they would get.It is the important factor helps to calculate the profitability of the company. And how effective the company in generating the company.

ROE can be calculated by dividing the net income of a company by the equity being currently held by the shareholders.

High ROI of the company represent that company is making consistentr profits. Many Experts have also point that companies with higher profits.

Note -If you want to know How to Find Multibagger Stocks you can read out our detailed blog which we have wrote on particular this topic.

My name is Anubhav and i write articles on multiple topics. Thanks for showing support.