Many investor have different ratios to look at the time of analyzing a companies financial stability,growth and risk here I will explain which ratios and other indicator to look at while analyzing this and what they actually mean.
Revenue :- The first and foremost and to me perhaps been the most important parameter to look at while investing is a company's revenue and it's growth rate. In our analysis we directly throwout a company which loose it's revenue.
Sales :- The second parameter to look at is on it's sales both in terms of value and volume and aggregated of the two. Along with it check the sales growth rate. We throw out the stocks which is unable to increase it's sales or maintain it growth rate.
Income :- The next parameter is to look at it's income both Operating income and Net income and their growth rate. We generally put caution if the operating income goes down and try to analyze the reason[like inventory cost adjustment, buying of new business or investment etc] though not directly remove this stocks from our portfolio unless there are other factors and then we check net income if it is improving with other growth rate then then very fine but if it decline then we will analyze the reason[ like Tax rate, Accounting policy change, Asset depreciation etc.] but not directly throw it out.
On the contrary if it increase due to sale of investment,tax rate,inventory cost adjustment etc then we might put a caution on the same.[For in depth explanation click here.]
Debt :- Then next parameter to look at is debt . Well this is a factor we must look with very care if a company has increasing debt it might be operating at risk (check the financial leverage at this case) but if the company has a tendency of repaying it's debt and continuously reducing debt to equity ratio with incremental EPS growth then it might be a good bet.
EPS :- The next parameter to look at is the EPS growth rate which is prima facie parameter for any investor to look at and a healthy growth rate is always appreciable.
ROCE :- The next parameter to look at is the ROCE and it's growth. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value. [ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed]
Profit Margin :- Tough Profit Margin could have been two type Operating Profit Margin and Net Profit Margin but we mainly check Operating Profit Margin & it should grow along with other i.e. % growth should be more than it's past average[3,5,10 year] and will be at par with PAT/Net Income growth and ROCE growth. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales.
[Operating Margin= Earnings Before Interest and Tax (EBIT) / Net Sales]
Free Cash Flow :- Free cash flow and it's growth rate also an important aspect as having free cash in hand means an effective investment option for future or dividend payout or repayment of loan on the other hand negative cash flow means possibility of dilution of share or taking new loan.
PE :- Check out if PE is too high or not compare to it's Forward PE or Industry PE. A low PE is always good.
PEG :- Check out the PEG to be under 1 or not. [P/E ratio ÷ Annual EPS Growth]
Other Factor :- Other factors like pledge shares needs to be avoided as I always consider them as nothing but a bad debt.
Revenue :- The first and foremost and to me perhaps been the most important parameter to look at while investing is a company's revenue and it's growth rate. In our analysis we directly throwout a company which loose it's revenue.
Sales :- The second parameter to look at is on it's sales both in terms of value and volume and aggregated of the two. Along with it check the sales growth rate. We throw out the stocks which is unable to increase it's sales or maintain it growth rate.
Income :- The next parameter is to look at it's income both Operating income and Net income and their growth rate. We generally put caution if the operating income goes down and try to analyze the reason[like inventory cost adjustment, buying of new business or investment etc] though not directly remove this stocks from our portfolio unless there are other factors and then we check net income if it is improving with other growth rate then then very fine but if it decline then we will analyze the reason[ like Tax rate, Accounting policy change, Asset depreciation etc.] but not directly throw it out.
On the contrary if it increase due to sale of investment,tax rate,inventory cost adjustment etc then we might put a caution on the same.[For in depth explanation click here.]
Debt :- Then next parameter to look at is debt . Well this is a factor we must look with very care if a company has increasing debt it might be operating at risk (check the financial leverage at this case) but if the company has a tendency of repaying it's debt and continuously reducing debt to equity ratio with incremental EPS growth then it might be a good bet.
EPS :- The next parameter to look at is the EPS growth rate which is prima facie parameter for any investor to look at and a healthy growth rate is always appreciable.
ROCE :- The next parameter to look at is the ROCE and it's growth. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value. [ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed]
Profit Margin :- Tough Profit Margin could have been two type Operating Profit Margin and Net Profit Margin but we mainly check Operating Profit Margin & it should grow along with other i.e. % growth should be more than it's past average[3,5,10 year] and will be at par with PAT/Net Income growth and ROCE growth. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales.
[Operating Margin= Earnings Before Interest and Tax (EBIT) / Net Sales]
Free Cash Flow :- Free cash flow and it's growth rate also an important aspect as having free cash in hand means an effective investment option for future or dividend payout or repayment of loan on the other hand negative cash flow means possibility of dilution of share or taking new loan.
PE :- Check out if PE is too high or not compare to it's Forward PE or Industry PE. A low PE is always good.
PEG :- Check out the PEG to be under 1 or not. [P/E ratio ÷ Annual EPS Growth]
Other Factor :- Other factors like pledge shares needs to be avoided as I always consider them as nothing but a bad debt.
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