Fundamental analysis is the key strategy used by legendary investors to learn and analyze a company to get better insights and make intelligent decisions. Fundamental analysis includes analyzing financial ratios like operational ratios, profitability ratios, valuation ratios and leverage ratios. Each financial ratios gives insights about the company’s performance. valuation ratios are essential in fundamental analysis as the ratios provide valuable insights into a company’s stock price relative to its financial performance. valuation ratios are prominent in fundamental analysis as it helps to understand whether a company is undervalued or overvalued. Valuation ratios helps the investors to find the undervalued stocks and to make intelligent investments for better returns. Valuation ratios are financial metrics that measure a company’s stock price relative to its financial performance. Investors should use these ratios along with other financial metrics to evaluate a company’s intrinsic value and make informed investment decisions.
VALUATION RATIOS
1. PRICE TO EARNINGS RATIO (P/E RATIO)
Price to earnings ratio is the ratio of a company’s share price to earnings per share (EPS). Low price to earnings ratio indicates undervalued shares, which are good for investing high price to earnings ratio indicates over valued shares, which are not good for investing.
P / E RATIO can be found by (CURRENT STOCK PRICE / EPS)
2. PRICE TO BOOK VALUE
Price to book value is the ratio that helps to compare a company’s market value to its book value. low price to book value indicates undervalued stocks which is desirable. High price to book value indicates overvalued stocks which cannot be considered for investment.
P/ BV can be found by (CURRENT STOCK PRICE / BOOK VALUE PER SHARE)
BOOK VALUE PER SHARE can be found by SHARE HOLDERS EQUITY / TOTAL NUMBER OF SHARES
3. PRICE TO SALES RATIO (P/S) RATIO
Price to sales ratio is the ratio that compares stock price of company with sales per share. If PAT margin of company is higher, it means it has quality sales and services are provided and thus price to sales ratio will be higher.
P/S RATIO can be found by (CURRENT STOCK PRICE / SALES PER SHARE)
4. DIVIDEND YIELD RATIO
The dividend yield is a valuation ratio that helps the investors to get an insight about the dividend income investors receive relative to the stock price. Dividend is the part of profit shared to the investors for being a share holder of the company. dividend yield indicates the percentage of a company’s stock price that is paid out in dividends each year. A high dividend yield indicates that investors are receiving a higher return on their investment through dividends, while a low dividend yield indicates that investors are receiving a lower return on their investment through dividends. Investors would be able to generate wealth if a company is providing great returns from dividend and capital appreciation. Good dividend yield ratio also indicates that the company is capable to report good profits every quarter and is able to provide a dividend income to their shareholders. It gives an insight how fundamentally strong the company is.
Dividend Yield can be found by (Dividend per Share / Stock Price) x 100
