Financial Ratios can be grouped into different categories. In this article, we shall go over profitability ratios Profitability Ratios Ratios under this category give a measure of how profitable a company is, and how efficiently it utilizes its resources for the same purpose. It includes the following: 1) Operating Profit Margin Formula: Operating Profit/ Net Sales This is an indicator of how efficiently a company runs its operations, and how healthy its margins are. Typically, wafer-thin margins in a highly competitive industry coupled with slowly growing revenues would not be a very good investment. Investors must look at the trend Profit Margins over time, and also at the industry average to make accurate estimations. 2) Return on Equity (ROE) Formula: Net Income/ Average Shareholder Equity Return on Equity tells a shareholder how efficiently the company has employed the money they invested in the company. This is a widely used indicator and is best served when compared with the industry and overall market. However, investors should realize that there could be considerable variations in the ratio, particularly when a company has issues preferred shares. 3) Return on Capital Employed (ROCE) Formula: Net Income/ (Average Shareholder Equity + Debt) Adding Debt to Equity in the denominator of the ROE converts it into ROCE, another popular indicator. Some analysts actually prefer ROCE as a company with a disproportionate amount of debt might give the impression of a high capital efficiency with a high ROE ratio. There are other financial ratios occasionally used, such as Return on Assets employed, however, for the purpose of the online retail investor, this level of analysis is sufficient. In the next article, we shall continue our exploration of financial ratios. MyValueTrade is an online stock trading platform that combines simplicity with a choice between fixed brokerage and a per order charge. We have amongst the lowest brokerage in India
Online stock traders investing for the long term need to have a solid understanding of fundamentals to have the greatest bang for their buck. We’ve already written about fundamental analysis, about reading balance sheets, income statements, and cash flow statements in the past. Today, we shall talk about key financial ratios. Financial Ratios are an excellent way of organizing the financial information of a company and putting the numbers in perspective.