Trading in financial markets, especially in the stock market, having information about financial indices of companies might be extremely useful. Not only beginners but also “market whales” use financial reports for market analysis.
If you have just started trading, try studying data and indicators of companies for reporting periods. Normally, companies give reports for a quarter, 6 months, and a year. Trading intraday, you may neglect those, but in medium-term and long-term investments, financial indicators and reports become influential.
See below such indices discussed in detail, including how they can influence your choice of stocks for investments.
Price/Earnings (or P/E) is a multiplier that demonstrates the ratio between the stock price and the yearly return on it. By P/E, the investor evaluates how long it will take for their investment to pay off.
- P/E lets you choose a company with overvalued or undervalued shares;
- Low P/E means that your investment will pay off soon;
- It is only applicable to companies that make a profit.
Find below a detailed article about P/E:
The P/S multiplier demonstrates the ratio between the price of the company to its annual revenue.
- If P/S is 2 or below, it is considered to be attractive for investments;
- Ideally, the indicator must be 1. This value will mean that, based on the current profit, your investment will pay off in a year.
- Unlike, P/E, P/S is applicable to losing companies.
P/CF is the ratio of the asset’s price and the company’s cash flow with regard to depreciation costs, capital expenditures, and the working capital. It is calculated by dividing the market capitalization of the company by the cash flow from completed market operations.
P/CF is traditionally evaluated as follows:
- P/CF above 20 means that the company is in trouble;
- P/CF between 15 and 20 is good;
- P/CF below 15 means that the company is in a perfect shape.
P/B or P/BV (Price-to-Book Value) shows the price of the company’s assets that can be sold if the company goes bankrupt minus its commitments (debts, expenses). This coefficient is a stock multiplier that shows whether the company is attractive for investments or whether its stocks are overvalued it the market. Undervalued shares have a chance to grow.
- The lower the P/BV, the more chances for growth the company’s shares have.
- This coefficient should be used alongside other indicators because it does not account for future income of the company.
Price/Earnings to Growth
PEG is a simplified version of P/E. It is calculated with regard to the forecast speed of growth of the company and shows whether it is now overvalued or undervalued, as well as its perspectives of development.
- PEG helps to find companies with expensive inner assets but undervalued in the market.
- In future, the shares of such a company will grow.
Current Ratio is literally the current sum of assets divided by the overall commitments of the company. Simply speaking, this is a demonstration of the company’s stability, showing whether it is able to pay off its short-term commitments by short-term assets.
- If the ratio if between 1.6 and 2, the company is attractive for investments.
- If the ratio is 1, this means the company can pay off its short-term debts completely.
- For Current Ratio, the sphere in which the company works is important because “normal” values are different for different activities.
Capitalization is the general company’s value in the market. It is calculated as the number of stocks in circulation multiplied by the current stock price. The value changes alongside the stock price and may differ from the actual price of the company. Quite often, market capitalization changes due to active trades or exchange speculations.
D/E is literally the ratio of the loaned capital of the company and the capital of its shareholders. As well as the Current Ratio, D/E is different for different economy branches, hence, it is incorrect to compare the D/E of an electric carmaker and a provider of online services.
- A too low D/E value means that the company uses the loaned money inefficiently.
- If the value is too high, the company risks losing its financial independence and stability.
COGS (Cost of Goods Sold)
COGS is the primary cost of sold goods and services. It includes all the expenses for buying materials, processing them, production, and the way of the final product to the consumer. COGS is influenced by purchase prices for raw materials, season of the year, region, and weather. For example, oil prices influence the price of gasoline for carriers and reflect in the final price for consumers. An increase in transportation prices harms the price of tourist services, etc.
Return on Assets
ROA is the profitability of assets, or the profit per currency unit (dollar). It shows whether the company’s management works efficiently. The multiplier is used to compare competing companies and shows whether assets are used efficiently for making a profit. ROA is calculated by dividing the net profit by all the assets. The average value depends on the sphere of the company’s activities.
Return on equity
ROE is the ratio of the company’s capital and the profit against the overall shareholders’ capital. For example, if ROE is 23%, every 100 USD of the company’s capital yield 23 USD of profit. The higher the profitability, the more attractive the company is.
Find below a detailed article about ROE:
Working capital per unit of profit
This multiplier represents the capital used daily (in cycles) for goods and services production. It is used to compare competing companies that work in one sector or by similar principles. The larger it is, the more opportunities there are to make a profit.
Nowadays, when we have computers everywhere, you do not need complicated calculations for analyzing financial indices. Most of them are published on official websites of companies in the section for investors.
Analyze the indicators, compare competing companies by them, and choose those that suit you. To simplify your analysis, take open Internet resources that provide reports of companies and calculators for multipliers.
Using all the indices for companies that work in completely different spheres is incorrect. Experienced investors construct their portfolios from stocks of competing companies.