Ratios For Stock Picking

1. Price to Earnings ratio

The price to earnings ratio is one of the most widely used financial ratio analysis among the investors for a very long time.

Price to Earning ratio= Price Per Share/Earnings Per Share

As a thumb rule, a low P/E ratio is preferred while buying a stock.

2. Price to Book value

Price to book ratio (P/B) is calculated by dividing the current price of the stock by the latest quarter's book value per share.

Price to Book ratio=Price per share/Book value per share

A lower P/BV ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.

3. Debt to Equity ratio

The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity).

Debt to Equity ratio=Total Liabilities/Total Shareholder Equity

As a thumb of rule, companies with a debt-to-equity ratio more than 1 are risky.

4. Return on Equity (ROE)

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity.

Return on Equity=Net Income/Average Stockholder Equity

As a thumb rule, always invest in a company with ROE greater than 20% for at least last 3 years.

5. Current Ratio

The current ratio is a key financial ratio for evaluating a company's liquidity. It measures the proportion of current assets available to cover current liabilities.

Current Ratio=Current Assets/Current Liabilities

As a thumb rule, always invest in a company with a current ratio greater than 1.

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