Table of Contents
Fundamental analysis involves evaluating a company’s financial health and performance using various ratios and metrics. These indicators help investors make informed decisions about buying, holding, or selling stocks. Understanding key ratios is essential for assessing a company’s value and growth potential.
Profitability Ratios
Profitability ratios measure a company’s ability to generate profit relative to sales, assets, or equity. They are crucial for assessing operational efficiency and overall financial health.
- Gross Profit Margin: Indicates the percentage of revenue that exceeds the cost of goods sold.
- Net Profit Margin: Shows the percentage of revenue remaining after all expenses.
- Return on Equity (ROE): Measures profitability relative to shareholders’ equity.
Liquidity Ratios
Liquidity ratios evaluate a company’s ability to meet short-term obligations. They are vital for understanding financial stability in the near term.
- Current Ratio: Compares current assets to current liabilities.
- Quick Ratio: Measures liquidity excluding inventory.
- Cash Ratio: Assesses cash and cash equivalents against current liabilities.
Valuation Ratios
Valuation ratios help determine whether a stock is overvalued or undervalued compared to its earnings or assets. They are essential for investment decision-making.
- Price-to-Earnings (P/E) Ratio: Compares a company’s share price to its earnings per share.
- Price-to-Book (P/B) Ratio: Relates market value to book value per share.
- Dividend Yield: Shows dividend income relative to stock price.
Efficiency Ratios
Efficiency ratios assess how well a company utilizes its assets and manages operations. They provide insight into operational performance.
- Asset Turnover: Measures sales generated per dollar of assets.
- Inventory Turnover: Indicates how often inventory is sold and replaced.
- Receivables Turnover: Shows how quickly receivables are collected.