One of the biggest dilemma's for new investors is how to pick good stocks which can give good returns in the long run. The best way to solve this problem is to look at a firm's fundamentals and use various metrics to gauge their performance over a long period of time, here's a few of them:
The Price to Earning ratio helps the investors determine the market value of a stock as compared to its earnings. The P/E ratio basically shows what the firm is willing to pay based on its past and future earnings. A high P/E ratio means that the firm is overvalued i.e its stock price is more compared to its earning. A low P/E ratio means the stock is undervalued. You should always try to find stocks which are undervalued as they will have higher upside potential.
The price to book ratio or P/B ratio measures whether a stock is over or undervalued by comparing the net assets of a company to the price of all the outstanding shares. The P/B ratio is a good indication of what investors are willing to pay for each dollar of a company's assets. The P/B ratio divides a stock's share price by its net assets, or total assets minus total liabilities.
The reason the ratio is important to value investors is that it shows the difference between the market value of a company's stock and its book value. The market value is the price investors are willing to pay for the stock based on expected future earnings. However, the book value is derived from a company's assets and is a more conservative measure of a company's worth. Again when looking for an undervalued stock investors should for a low P/B ratio mostly in the range of 0.5 to 1 as such companies have good upside potential.
The debt-to-equity ratio helps investors determine how a company finances its assets. The ratio shows the proportion of equity to debt a company is using to finance its assets.
A low debt-to-equity ratio means the company uses a lower amount of debt for financing versus equity via shareholders. A high debt-equity ratio means the company derives more of their financing from debt relative to equity. Too much debt can pose a risk to a company if they don't have the earnings or cash flow to meet its debt obligations.
As with the previous ratios, the debt-to-equity ratio can vary from industry to industry. A high debt-to-equity ratio doesn't necessarily mean the company is run poorly. Often, debt is used to expand operations and generate additional streams of income. Some industries, with a lot of fixed assets such as the auto and construction industries, typically have higher ratios than companies in other industries.
The price-to-earnings-to-growth (PEG) ratio is a modified version of the P/E ratio that also takes earnings growth into account. The P/E ratio doesn't always tell you whether or not the ratio is appropriate for the company's forecasted growth rate.
The PEG ratio measures the relationship between the price/earnings ratio and earnings growth. The PEG ratio provides a more complete picture of whether a stock's price is overvalued or undervalued by analyzing both today's earnings and the expected growth rate.
Typically a stock with a PEG of less than 1 is considered undervalued since it's price is low compared to the company's expected earnings growth. A PEG greater than 1 might be considered overvalued since it might indicate the stock price is too high as compared to the company's expected earnings growth.
cash flow is the cash produced by a company through its operations, minus the cost of expenditures. In other words, free cash flow or FCF is the cash left over after a company pays for its operating expenses and capital expenditures.
Rising cash flow is also an indicator that the firm will increase its earnings in the future, rising free cash flows could the stock reward investors in the future which is why many investors cherish FCF as a measure of value. When a company's share price is low and free cash flow is on the rise, the odds are good that earnings and the value of the shares will soon be heading up.
No single financial ratio can determine whether a stock is a value or not. It's best to combine several ratios to form a more comprehensive view of a company's financials, it's earnings, and its stock's valuation. I would like to suggest a site which provide free tips for investors looking to pick good stocks and earn great revenue https://bestbrokerindia.com/index.html.
I hope this helps young and budding investors in India.