There are many financial ratios that investors can use to evaluate a company’s financial health and performance when selecting stocks. Some common ratios used in quality stock selection include:
Price-to-earnings ratio (P/E ratio):
This is a measure of a company’s valuation, calculated as the company’s stock price divided by its earnings per share (EPS). A high P/E ratio may indicate that the market is expecting the company’s earnings to grow in the future.
Price-to-book ratio (P/B ratio):
This is a measure of a company’s valuation, calculated as the company’s stock price divided by its book value (the value of its assets minus its liabilities). A low P/B ratio may indicate that the stock is undervalued.
Debt-to-equity ratio (D/E ratio):
This is a measure of a company’s financial leverage, calculated as the company’s total liabilities divided by its total equity. A high D/E ratio may indicate that the company is heavily reliant on borrowing to finance its operations.
Return on equity (ROE):
This is a measure of a company’s profitability, calculated as the company’s net income divided by its equity. Companies with high ROE are generally considered to be more profitable and potentially more attractive to investors.
Earnings per share (EPS):
This is a measure of a company’s profitability, calculated as the company’s net income divided by the number of shares outstanding. Companies with high EPS are generally considered to be more valuable to investors.
Operating margin:
This is a measure of the company’s profitability, calculated as the company’s operating income divided by its revenue. Companies with high operating margins are generally more profitable, as they are able to generate more profit from each dollar of revenue.
Dividend yield:
This is a measure of the income a company’s stock provides to its shareholders, calculated as the company’s annual dividend per share divided by its stock price. Companies with high dividend yields may be attractive to investors looking for income from their investments.
Price-to-sales ratio (P/S ratio):
This is a measure of a company’s valuation, calculated as the company’s stock price divided by its sales per share. A high P/S ratio may indicate that the market is expecting the company’s sales to grow in the future.
Price-to-free cash flow ratio (P/FCF ratio):
This is a measure of a company’s valuation, calculated as the company’s stock price divided by its free cash flow per share. A low P/FCF ratio may indicate that the stock is undervalued.
Return on assets (ROA):
This is a measure of a company’s profitability, calculated as the company’s net income divided by its total assets. Companies with high ROA are generally considered to be more efficient at using their assets to generate profits.
Again, it’s important to keep in mind that financial ratios can vary widely depending on the industry and market conditions, so it’s a good idea to compare a company’s ratios to those of its peers in the same industry when evaluating its financial health and performance.
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