A ratio is a comparison of one number to another. Similarly, Financial ratio is the comparison of two financial values of a company taken form the company’s financial statement. Financial ratios indicates **profitability** and** efficiency** of a stock. How much company earns from its each share, a stock price is **overpriced or underpriced**, etc. such information can be obtained just by knowing the value of different financial ratios. There are various financial ratios but i will discuss here six **basic** **key ratio** which are very important to know for value investing.

**Definition :** Earning per share is defined as the portion of company’s profit allocated to each outstanding share of Common Stock. In common words, it is a part of profit that a company earns from each issued share.

**Formula :**** **** **

- EPS = Net income ÷ Total No. Of Outstanding Share

**Definition :** also known as price multiple, defined as the ratio of a company’s current stock price (market value) to the company’s Earning per share(Eps). In common words, P/E ratios tells us how much money a investor need to pay for one rupee of income.

**Formula :**

**Definition :** Also called dividend price-ratio, defined as, a dividend expressed as a percentage of a current share price.

Note : Dividend is the sum of money paid regularly (typically quarterly or annually) by a company to its shareholders out of its profits.

**Formula :**

Dividend per share

Dividend yield(%) = —————————— x 100

Market price per share

**Definition :** also known as return on net worth, defined as measure of profitability that calculates the amount of profit a company generates with each rupee of shareholders’ equity. In common words, it is the amount of profit that a company earns from money invested by shareholders.

**Formula :**

- ROE (%) = Net Income ÷ Shareholder’s Equity

**Note :** Shareholder’s equity does not include preferred shares.

**Definition :** Debt to equity ratio used to know the relative proportion of company’s finance from debt and shareholder’s equity. In simple words, how much capital a company holds from debt and shareholder’s equity.

**Formula :**

- D/E ratio = Debt ÷ Equity

**Definition :** Book value is similar to equity of the company. If a company get closed, then after paying all of its liabilities (excluding intangible asset), the total value left will be the Book Value of the Company. Book value is written on Balance sheet.

**Formula :**

- Book Value = Total asset - Total liabilities

There are also various other ratios like Working capital ratio, Quick ratio, Price to sales ratio - P/S ratio, etc. which will be covered soon in coming articles.

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