Financial ratios for companies' analysis
What is earnings per share (EPS)?
Earnings per share (EPS) indicates how much profit could be distributed to investors. A high or rising EPS is seen as positive, while a low or falling EPS can deter investors as it may signal a downturn.
EPS = (net profit - preferred dividends) ÷ outstanding shares.
What is a price-to-earnings ratio?
The price-to-earnings (P/E) ratio is found by dividing a stock’s price per share by its earnings per share. It helps investors determine if a stock is over or undervalued compared to competitors or the sector.
P/E = price per share ÷ earnings per share.
What is a price-to-cashflow ratio?
The price-to-cashflow (P/CF) ratio is calculated by dividing a company’s market capitalisation by its operating cash flow. It’s an alternative to the price-to-earnings (P/E) ratio, as cash flows are less affected by accounting practices. A lower P/CF ratio may suggest an undervalued stock, while a higher ratio could mean it’s overvalued.
P/CF = market capitalisation (value of all shares) ÷ operating cash flow.
What is return on equity?
Return on equity (ROE) measures a company’s net income relative to its shareholders’ equity. It shows how efficiently a company uses equity to generate profit. A higher ROE can indicate efficient management, but may also imply high debt levels.
ROE = net income ÷ shareholders’ equity.
When making investment decisions, financial analysis and ratios should not be looked at in isolation.