Basics Of Financial Ratios

Basics Of Financial Ratios

It is quite important that you learn about calculating financial ratios before you begin trading or investing in stocks. Even though you choose a broker to do all the work for you, you still should know what do they imply and what it tells about the organization which you plan to invest. Or else, you will end up in purchasing into a business which has too much of debt and not enough money to survive. However, if you are trading with cryptocurrencies you just need to invest the money and manage other important things in your life as the trading software like the there code will conduct all the work from beginning to end. Learn more about it here. Below mentioned are the important financial ratios one should be aware of.

Ratios to learn

The ratio of price to cash flow- Most of the investors would like to focus on this ratio. This ratio is calculated by dividing the cash flow from all the operations that are mentioned in the cash flow statement by the current share price.  This ratio differs from industry to industry. For instance, the organizations that have more capital-intensive operations will have a lower ratio as the money received is used back into the materials, maintenance, fixed assets and so on. However, other companies like software will allow a higher ratio as they require low capital requirements.

The ratio of price to earnings- It is the most popular ratio used by all.  With the help of this ratio, one can easily determine whether the stock is expensive or not. It shows for every dollar the business generates, how much the trader is willing to pay for it.

PEG ratio- This ratios stand for the price-to-earnings-to-growth ratio. This ratio helps in adjusting the shortcomings of the P/E ratio. In order to arrive at this ratio, you should divide growth in earning for each share by the p/e ratio.  Lower this ratio means cheaper the stock will be. But the limitation of this ratio is that naturally, humans are very much optimistic. If you bank too much on a bright future, the stocks which are worthless will appear to be a good catch. Hence one needs to have a mental discipline while using this ratio and keep a check on the growth assumptions.

Asset turnover ratio- These ratio works helps in calculating the total sales for every dollar of the asset an organization owns. It helps in measuring the efficiency of the organization using its assets.