# Stock ratios with examples which every stock trader should know.

**What is Ratio Analysis?**

**Ratio analysis** determines the mathematical relationship between different components in financial statement accounts, they are easy to understand and simple to compute the relationships. Ratios help us to analyse the strength and weaknesses of the companies and industries. Financial ratios are generally classified into profitability, short term & long term solvency, turnover, investment leverage and coverage ratios.

**What is PE Ratio?**

The **price-earnings ratio i.e. P/E Ratio** is the ratio for valuing a company that measures its current share price relative to its per-share earnings. In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings.

- Investors often use this ratio to evaluate what a stock’s fair market value should be by predicting future earnings per share.
- Companies with higher future earnings are usually expected to issue higher dividends or have appreciating stock in the future. Investor speculation and demand also help increase a share’s price over time.
- The price earnings ratio formula is calculated by dividing the market value price per share by the earnings per share.

__Example of pe ratio:__

The ACC stock is currently trading at Rs.500 a share and their earnings per share for the year are Rs.50 . ACC P/E ratio would be calculated like this:

PE = Market Price / EPS

As you can see, the ACC ratio is 10 times. This means that investors are willing to pay 10 rupees for every rupees of earnings. In other words, this stock is trading at a multiple of ten.

**What is PV Ratio?**

**Profit-Volume Ratio** shows the relationship between ‘the value of sales and contribution’ and is usually expressed in %.

Generally it is calculated as follows: PV Ratio = Contribution/ Sales * 100

This ratio shows the amount of contribution per rupee of sales. Since, fixed cost does not change, in the short-term the profit-volume ratio also measures the rate of change of profit due to change in the volume of sales. It may be used for the calculation of the desired volume of output, profit or other essential facts.

**What is Leverage Ratio?**

Companies rely on a mixture of owners’ equity and debt to finance their operations. A **leverage ratio **is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations. The most common leverage ratios are the debt ratio and the debt-to-equity ratio.

__Example of leverage ratio:__

DEBT TO EQUITY RATIO:Company XYZ had 4 crore of debt and 2 crore of equity

Calculation: 4crores / 2 crore = 2 crore of debt to equity ratio

## **What is Profitability Ratio?**

**Profitability ratios** are ratios which are way to measure a company’s performance by measuring a business’s ability to generate earnings compared to its expenses or profitability. Profitability is simply the capacity to make a profit, and a profit is the amount which is left over from income earned deducting all costs and expenses related to earning the income. The Profitability Ratios measure the overall performance of the company in terms of the total revenue generated from its operations. It implies that the ratios which measure the capacity of a firm to generate profits out of the expenses and the other cost incurred over a period are called the profitability ratios.

Common profitability ratios used in analyzing a company’s performance include gross profit margin (GPM), operating margin (OM), return on assets (ROA), return on equity (ROE), return on sales (ROS) and return on investment (ROI).

**What is CAGR?**

**Compound Annual Growth Rate (CAGR)** indicates the compound growth rate of the amount invested over a specific time interval. It is used to indicate revenue growth or decline of a company over a period of time.

Formula: {[(End value)/(Start Value)] ^(1/No of years)} – 1

__Example:__ If you want to calculate CAGR of a company over 5 years:

Starting value: Rs.10000

Year 1: Rs 12500

Year 2: Rs 25000

Year 3: Rs 30000

Year 4: Rs 40000

Year 5 (Ending Value): Rs 60000

- [(60000/10000)^(1/5)] – 1
- [6^(0.2)] – 1
- 1.43 – 1
- 43%.

Rs 10000 have given a compounded return of 43% in each of the five years.

**How to calculate Gross Profit ratio?**

- The Gross Profit Margin is computed by dividing the company’s Gross profit by its Net sales.
- Gross Profit is the total revenue or the cost of goods sold. i.e. it is a profit made by the company after deducting the costs or expenses associated with making and selling its products or the costs associated with providing its services.
- Company’s Gross Profit Ratio should be high when compared to other companies in order to cover its selling and administrative expenses.

__Example:__

If company A’s Gross profit is Rs.800000 and Net Sales is Rs.200000. Then the Gross Profit Ratio is 25%

**What is Operating Margin?**

**Operating margin** is the ratio of operating income divided by the net sales of a company. It is the proportion of company’s revenue after paying its variable costs like wages, raw materials, etc. It is also known as Operating Income Margin, Operating Profit Margin or Return on Sales. It resembles the profitability of the company and often used to compare the profitability among the companies.

**Example of operating margin: **If ‘R’ company’s operating income is Rs.150000 and the net sale of the year is Rs.10000. Then its Operating Margin is 15%.

**What is Book Value per Share?**

**Book Value per share** is the per share value of the company based on its equity available to its common shareholders. The term “Book Value” refers to the company’s assets over liabilities. It is similar to the net worth as it means the assets minus liabilities. It is used to compare the firm value with other companies. It may be sometimes used by the investors to determine the equity compared with the market value. It is also called as Stockholder’s equity, shareholder’s equity, owner’s equity or sometimes simply equity.

**Example of book value per share: **If Mr. S is holding 20 shares and his equity value is 10000. Then his Book value per share is Rs.500

**What is dividend yield?**

**Dividend yield** is the relation between a stock’s annual dividend payout and its current stock price. It tells an investor the yield he/she can expect by purchasing a stock. It is an important factor in determining the true value of dividend stocks and is expressed in percentage.

### How to calculate dividend yield?

Formula to calculate dividend yield: DPS (Dividend per Share) / M.P.S (Market Prices per Share)

__Example:__ If stock XYZ had a share price of Rs.50 and an annualized dividend of Rs.1.00, its yield would be 2%.

i.e., Rs.1.00 / Rs.50 = .02

When the 0.02 is put into percentage terms, it would make a 2% yield.

If this share price rose to Rs.60, but the dividend payout was not increased, its yield would fall to 1.66%.

**What is BETA in Stock Analysis?**

**Beta** is an important component of the capital asset pricing model that uses volatility and risk to estimate expected returns. The beta of an investment indicates the investment is more or less volatile than the market. A Beta less than 1 indicates that the investment is less volatile than the market and if Beta is more than 1 indicates the investment is more volatile than the market.

- Volatility is measured as the fluctuation of the price.

__Example of BETA:__

- FMCG companies are generally caries low Beta as they are defensive in nature.
- BANKING, Metal and Infra stocks beta are generally high. Hence it is very sensitive to the market move

** ****What is Operating Leverage?**

**Operating leverage** is percentage of fixed cost with in a company operating structure. It is used to evaluate a potential break Evan point for operating cost. It also is used to determine profit levels from individual sales.

Formula: Operating Leverage =

[Quantity x (Price – Variable Cost per Unit)] / Quantity x (Price – Variable Cost per Unit) – Fixed Operating Cost

__Example:__ Assume Company TOT sold 1,000,000 widgets for Rs.12 each. It has Rs.10,000,000 of fixed costs (equipment, salaried personnel, etc.). It only costs Rs.0.10 per unit to make each widget.

Using this information and the formula above, we can calculate that Company TOT’s operating leverage is:

[1,000,000 x (Rs.12 – Rs.0.10)] / 1,000,000 x (Rs.12 – Rs.0.10) – Rs.10,000,000 = Rs.11,900,000/Rs.1,900,000 = 6.26 or 626%

This means that a 10% increase in revenues should yield a 62.6% increase in operating income (10% * 6.26).

**What is Solvency Ratio? **

**Solvency ratio **is the capability of the company to encounter its financial responsibilities, the ratio which compares the company’s revenues are adequate to meet the liabilities.

- Solvency ratio = Net income (after tax) + Deprecation / short-term + long term liabilities.

**Example of solvency ratio:** XYZ Company borrowed money to stabilize its operation and unable to repay it immediately, In this case, it is assumed that the company will make payments in future because of increased cash flow for its operation stability.