Investing in the Stock Market -- Lesson 3
January 21st 2008 10:07
Financial Ratios
Financial ratios help you find out the characteristics of a business. They are many, but I will concentrate here on a few of the most meaningful.
Return on Equity (RoE) is, of all, the most important ratio. It is calculated by dividing the Net Profit After Tax (NPAT) by the Equity. The RoE tells you how profitable the company is.
The Net Profit Rate (NPR) shows what margins the business is achieving. It is calculated by dividing the NPAT by the Sales figure.
The Current Ratio (CA/CL) shows the current assets ability to cover for current liabilities. It is calculated by dividing the Current Assets by the Current Liabilities. A proportion of 2/1 is desirable.
Earnings Per Share (EPS) is not a ratio. It’s made of the NPAT divided by the number of shares outstanding in the company. Once you know the EPS, though, you can compare it with previous years EPS.
To find out the EPS growth rate you would have to use compound interest calculations. Such, though, is out of the scope of this article.
To find out free financial data for your company you can use this web address: http://money.ninemsn.com.au/shares-and-funds/research-a-company/intro.aspx?subsectionid=4060&inforeq=Overview. All you have to do is enter the company name or its three letter ASX code.
Financial ratios help you find out the characteristics of a business. They are many, but I will concentrate here on a few of the most meaningful.
Return on Equity (RoE) is, of all, the most important ratio. It is calculated by dividing the Net Profit After Tax (NPAT) by the Equity. The RoE tells you how profitable the company is.
The Net Profit Rate (NPR) shows what margins the business is achieving. It is calculated by dividing the NPAT by the Sales figure.
The Current Ratio (CA/CL) shows the current assets ability to cover for current liabilities. It is calculated by dividing the Current Assets by the Current Liabilities. A proportion of 2/1 is desirable.
Earnings Per Share (EPS) is not a ratio. It’s made of the NPAT divided by the number of shares outstanding in the company. Once you know the EPS, though, you can compare it with previous years EPS.
To find out the EPS growth rate you would have to use compound interest calculations. Such, though, is out of the scope of this article.
To find out free financial data for your company you can use this web address: http://money.ninemsn.com.au/shares-and-funds/research-a-company/intro.aspx?subsectionid=4060&inforeq=Overview. All you have to do is enter the company name or its three letter ASX code.
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