Financial Ratios

Today, I shall talk about some of the financial ratios which you might have heard of but have no idea what they really mean. Not that I know all of them, I'm still learning. I shall update this page when I understand more relevant ratios in fundamental analysis.

Financial ratios are an easy way for us to access the strength/weakness of a company. They help us look into areas such as solvency, operational efficiency and profitability. In short, it's supposed to help us in making our investment decisions in common stocks.

Of course, these ratios mean absolutely nothing if creative accounting was used in the first place. So make sure it's a reputable company you're looking at! It's not worth the effort to calculate ratios if it's not credible.


We shall start off with something common. Most people here should have heard about the

Price Earnings Ratio = (Price/Adjusted EPS)

The P/E ratio shows the amount of times over its earnings that an investor is willing to pay for that share. A good indicator, but do take note that it varies across the different industries. Although a high P/E ratio might mean speculation, it might also mean that investors have a high expectation that the company's earnings will improve in the future.


Next up,

Adjusted EPS ($) = (Earnings/Latest No. of Shares)

EPS is Earnings Per Share. It shows the profitability of a company and is one of the most popular financial ratios. Simply put, if the EPS of a company is $1, it means that the company have earned $1 for every share you hold in that company. Naturally, we want this value to be as high as possible.


Following which, we have the

Adjusted NAV ($) = (Shareholders' Equity/Latest No. of Shares)

NAV means Net Asset Value and is used to describe the value of an entity's assets less the value of its liabilities. Try to buy shares at a price below this value! This is especially easy in bear markets when sentiments are very negative, or so I heard.


Also very important for your investments is the

Return On Equity (%) = (Net Income/Equity)

This determines the rate of return for your investment in the business. By comparing this ratio against the ratio of other companies in the same or similar industry, we can get an idea of whether this company is making enough profits to keep itself afloat.

Alright, time's up. Stay tuned for my next posting where I will share with you how Joel Greenblatt goes about beating the market by making average annualized returns of 40% for over 20 years. Meanwhile, earn and save all you can so that you can capitalise on this method (But only if you want to).