Episode 7: Important Rations to be known.

Important Ratios to be Known Before Buying a Stock

P/E Ratio

P/E means price to earnings ratio. Price represents the value at which the stock is trading. here earning represent company earnings. The company earning should converted to earning per share.

For Example: A company's total earnings is Rs. 10000 and company has floated 1000 shares in the market and the market value of the shares is Rs. 50

Earnings per share = 10000/1000 = Rs. 10

P/E Ratio = 50/10= 5

This Ratio help us to find the company is undervalued or overvalued. Depending upon the industries the overvalued and undervalued range variers so check that before investing.

Return On Equity

Return on Equity or ROE helps the investors to find how much return he/she going to get. 

ROE= Net Income/Total Shareholder's equity

Consider a company made a net income of 1000 the company had issued 100 shares at Rs. 100. Then the ROE is

ROE=1000/100*100=.10=10%

The ROE % may higher for some companies before going into that check the total assets and liabilities of the companies.

Debt to Equity Ratio (D/E Ratio)

It explains Companie's debt and equity of the company. It can be find using dividing Companie's total liabilities by total shareholder's equity.

The D/E ratio can help you determine if the company has a lot of debt or not. A high D/E ratio means higher debt and vice-versa.

There is no ideal D/E ratio as it can vary with industries and sectors.