Ratios? What are these ratios?

Every time that you plan on investing on a stock, you have to look at ratios because they are an indicator of the performance of your stock. I will be simplifying a couple of the ratios that you should be looking for when you are planning to invest in a stock:

1) Price/Earnings Ratio:
This is one of the ratios that you should be using often because it tells you in which direction the stock would be moving at. For example, the equation: High P/E and high growth means that the company is going to be innovative or explosive most of the time. Small companies or companies that are growing normally have these type of high p/e ratios. A company that has a high reputation like Coca Cola would have a low p/e, but at that same time don't expect the stock to be huge and get you rich. Look on Yahoo and you can see the P/E ratio.

2) Earnings Per Share:
Earnings per share shows how much profit the company going to have for that time period. So if the Earnings per share increases that means that the company will be increasing profits. Here is the equation:

3) Return on Investment:
This single handedly ratio can tell you how much return to expect from this stock. For example, if a company has an ROI of 15%, that means that if you left your money with the company your return would be 15%. Lets say for example, the CD at the local bank is 1-2% than the ROI would be about that ratio, so imagine if you investing in Coca Cola, your return is 24% not bad right?

4) Dividend Yield:
When you are holding shares of stock for a company, some companies actually compensate and return the money to you. This is in the form of dividends, dividends are delivered to you in check or in your brokerage account depending on which choice you pick. Companies that tend to have high yields don't grow as much as companies that do because companies that don't pay dividend reinvest everything in the profit while companies that do repay the investors. For example, you look at ATT stock the yield is 6%, but if you look at Apple, it has no dividend at all. Make sure that if you don't need the money from the dividends then you can reinvest the dividends. This meaning of reinvesting dividends means that you are using that check that company is giving you and you are buying more of that stock with that money. This does increase your return on investment.


So here are some of the ratios that you could be looking at when you are investing in a company. These are not the only ones investors should not be looking at, but these are some that should be taken into consideration.


References: Investopedia.com


Twitter: Leshrocko


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