Several Important, Common Stock Ratios for Stock Investing

There are several important, common ratios stock investors can use when evaluating stocks including small cap stocks, value stocks, penny stocks and growth stocks. Ratios are tools for investors based on a company's financial or other information. There is no one magic number, but as a whole ratios can be powerful when used in combination.

One of the most well known, if not the most well known stock ratio is the P/E ratio, known as just the PE ratio or Price to Earnings ratio or even known as the earnings multiple/ multipler. The P/E ratio of a stock is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. Quite simply, the P/E ratio is calculated by dividing the stock price of a share by the annual earnings per share. Annual earnings per share is known as EPS. Generally, stocks with higher earnings growth will have a higher P/E and those with lower earnings growth will have a lower P/E.

Another famous stock ratio is the Price / Sales ratio or the P/S ratio, or price-to-sales ratio. It is another valuation metric for stocks. It is calculated by dividing the company's market cap by the company's revenue in the most recent fiscal year, or the most recent four fiscal quarters. Another way to calculate the P/S of a stock would be to divide the per-share stock price by the per-share revenue. The P/S ratio can be used to determine the value of a stock relative to its past performance. It can also be used to determine the relative valuation of a sector or the market as a whole.

The price-to-book ratio, or P/B ratio, is another common ratio used when evaluating stocks. It is a financial ratio to compare a company's book value to its current market price. Book value describes the amount of the company held by the shareholders. To calculate the P/B ratio, stock market investors should divide the company's market capitalization (market cap) by the company's total book value from its balance sheet. This is another way to find the best stocks out of the large group of value stocks out there.

Another common stock investing ratio is the PEG ratio. The PEG ratio is also known as the Price/Earnings to Growth ratio. It is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected growth.

In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

by Gusher Stocks