9 Financial Ratios every investor should know! A detailed thread🧵⤵️ #StockMarket #finance

1⃣ Gross profit ratio:

This ratio tells you what your business made after paying for the direct cost. 

GPM of 50-70% is considered healthy & it would be for many types of businesses, like retailers, restaurants, manufacturers & other producers of goods.

2⃣ Operating profit margin:

OPM show how well the company’s operations contribute to profitability.  

A higher operating margin indicates that the company is earning enough money from business operations to pay for all associated costs involved in maintaining the business.

3⃣ Return on Equity(ROE):

ROE means how effectively a business uses its equity & cumulative retained profits to generate income. 

A general thumb rule says high ROE shows that the company’s management is more efficient in utilising its equity capital to grow its business.

For ROE to make sense and add meaning, it must be compared to the company's previous ROEs or the industry average to produce a uniform decision.

4⃣ Return on Asset(ROA):

ROA shows how well the company is utilizing its assets to generate profits. Measuring ROA is more fruitful for companies which are highly dependent on assets for generating revenue like construction, steel industry etc.

In general, higher ROA shows higher efficiency of the company in generating profits through its assets employed.

5⃣Return on Capital Employed(ROCE):

It shows how much operating profit a company makes compared to the capital provided to the company by banks & investors. 

A high ROCE indicates that a larger chunk of profits can be invested back into company for the benefit of shareholders

6⃣ Earning per share(EPS):

EPS highlights the company's profitability and indicates how much money a business makes for each share of its stock. 

However, the higher the EPS, the higher the profits.

7⃣ Price to Earning ratio(P/E ratio):

The P/E ratio establishes a relationship between the stock price & EPS of the company. 

It is beneficial for investors as it aids in knowing the profitability of the company and how profitable it will be in future.

A high P/E ratio may indicate that the company will be performing well in the future, and the investors are ready to buy it for a higher price also.

8⃣ Current ratio:

It determines the liquidity of company. A lower ratio depicts dat company does not have enough resources to pay its dues on time. While very high ratio is also not gud as it either indicates, company is not able to recover its dues frm debtor or has idle cash.

A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to cover its debts

9⃣ Debt to Equity ratio 

This ratio shows the long time survival of the company. It brings to light the fact of how much the company is dependent on the borrowed funds and how much can it meet its financial obligations on its own.

A good Debt to Equity ratio will range from 1 to 1.5, depending on the industry. In case of industries like heavy capital intensive, steel & cement Debt to equity can be high because of the use of high working capital requirements.

Having said that, all these ratios can't be the sole deciding factor while investing. All the attributes in a company are intertwined and must be taken into consideration before making any investment decision.