Ratios important for Company

analysis for Investor

Group 3
Prathamesh Gadgil 1920
Ashvin Mandrekar 1933
Gaurav Naik 1938
Sanjana Raikar 1951
Gaurav Parab 30-2019
1.EARNINGS PER SHARE
• EPS indicates how much money a company makes for each share of its stock, and
is a widely used to estimate corporate value.
Example: ABC Co.
No. of shares= 1,000
Profit= 50,000
EPS= 50,000 = 50 per share
1,000
• In simple terms, EPS is a portion of profit that belongs to one share.
• Companies with increasing Earnings per share for the last couple of year can be
considered as a healthy sign.
2.Return on assets (ROA)
• Return on assets (ROA) is an indicator of how profitable a company is relative to
its total assets. It can be calculated as:

• ROA = (Net income/ Average total assets)

• A company with higher ROA is better for investment as it means that the
company’s management is efficient in using its assets to generate earnings.
Always select companies with high ROA to invest.
 3. PRICE EARNING RATIO (P.E. RATIO)
• The price-earnings ratio (P/E ratio) relates a company's share price to its earnings
per share.
• EXAMPLE: ABC Co.
• Share price= 500
• EPS= 50 ( From previous example)
• PE ratio= 500 (share price)
50 (EPS)
= 10
• It means that you’re paying 10 Rs. to get back one rupee yearly from the
company. In other words, if you invest 10Rs. in the company, you will get back all
your money from earnings after 10 years.
• A stock with P/E ratio of 10 to 15 is fairly priced.
• A stock with low P/E ratio is considered cheap but low P/E doesn't mean that you
should buy it without proper research.
• A high P/E ratio could mean that a company's stock is over-valued, or else that
investors are expecting high growth rates in the future.
3. Net Profit margin
• Increased revenue doesn’t always mean increased profits. Profit margin reveals
how good a company is at converting revenue into profits available for
shareholders. It can be calculated as:

• Profit margin = (Net income/sales)

• A company with steady and increasing profit margin is suitable for investment.
4.DEBT TO EQUITY RATIO
• It gives us an idea of the company’s debt compared to the total value of its stock.
• Example:
• Total debt= 10,00,000
• Total share value = 1000 (No. of shares) X 500 (price per share)
= 5,00,000 Rs.
So, Debt Equity ratio= 10,00,000 = 2
5,00,000
• Which means the company has leveraged twice the amount of money that it has
on stocks.
• The debt-to-equity ratio is associated with risk: A higher ratio suggests higher
risk and that the company is financing its growth with debt.
• The optimal D/T ratio varies by industry, but it should not be above a level of 2.0.
5.Asset turnover ratio
• It tells how good a company is at using its assets to generate revenue. Asset
turnover ratio can be calculated as:

• Asset turnover ratio = (sales/ Average total assets)

• Higher the asset turnover ratio, better it’s for the company as it means that the
company is generating more revenue per rupee spent.
6. RETURN ON EQUITY (ROE)
• Return on equity (ROE) measures how effectively management is using a
company’s assets to create profits.
• It shows the return we get from profits in terms of percentage.
• Example: ABC Co.
We know, Net income/ Profits= 50,000
Total shares = 1000
ROE = 50,000 (Net income)
1,000 (total shares)
= 50 X 100 (to convert into %)
= 5000%
• Now 5000% is very unrealistic. We just took the numbers as an example, a higher
ROE means the company is performing well. Usually investors will aim for ROE
greater than 15%.

• It shows how good is the company in rewarding its shareholders. A higher ROE
means that the company generates a higher profit from the money that the
shareholders have invested. Always invest in companies with high ROE.
7. Current Ratio
• It tells you the ability of a company to pay its short-term liabilities with short-term
assets. Current ratio can be calculated as:

• Current ratio = (Current assets / current liabilities)

• While investing, companies with a current ratio greater than 1 should be preferred.
This means that the current assets should be greater than current liabilities of a
company.
Thank You