Financial ratios are useful metrics for analysing a stock investment. They give investors an indication of a company’s financial performance relative to the overall market, and can be calculated using data extracted from financial statements. However, no single ratio alone should be used to value a stock. Investors usually analyse different ratios to form a more holistic picture of a company's financial health and investment viability.
What are some examples of financial ratios?
The Price-to-Earnings (P/E) ratio
and the Price-to-Book (P/B) ratio
are two commonly used financial ratios for stock valuation. The P/E ratio is derived from dividing a company’s current stock price by its earnings per share (EPS). It’s a measure of how much investors are paying for every $1 of a company’s earnings. In essence, it tells us how the public feels about a company (its stock price) and how well the company is actually doing (its...