Return on equity (ROE) | Earnings generated relative to the amount invested by shareholders
ROE = Net income / Shareholders’ equity | ROE is a measure of a company's profitability. It is useful for evaluating the company's efficiency in managing its shareholder's equity. A high ROE indicates the company is effective in using shareholders' investment to generate earnings. |
Earnings per share (EPS) | Earnings of a company allocated to each outstanding share of common stocks
EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares | It determines a company's profitability and its ability to distribute dividends or reinvest the funds for growth.
A comparison of EPS over the years tells us the progress of the company's growth. |
Price-to-earnings ratio (P/E ratio) | Ratio of a company's market price in relation to its earnings per share. It is also known as price multiple or earnings multiple.
P/E ratio = Market price per share / Earnings per share | It indicates how much an investor is willing to pay per dollar of earnings. It is also an useful indicator of expectations of growth opportunities. When comparing P/E ratios, it is important to compare companies of the same industry and characteristics. |
Price-to-book ratio (P/B ratio) | Ratio of a company's market value in relation to its book value.
P/B ratio = Market price per share / Book value per share | P/B ratio is one of the factors that can help determine if a stock underpriced or overpriced when compared to its book value.
Value investors are generally interested in companies with low P/B ratios. |
Dividend payout ratio | Ratio of earnings paid out in dividends to shareholders.
Dividend payout ratio = Dividends per share / Earnings per share | It can be used to determine the sustainability of a company's dividend payout.
A high dividend payout ratio indicates that a company is paying out more dividends as opposed to retaining its earnings. |
Dividend yield | Annual dividend payout relative to company’s share price
Dividend yield ratio = Annual dividend paid per share / Share price | Measures the rate of return a shareholder receives for each dollar invested.
Dividend yield is usually considered alongside a company's dividend payout ratio. A company with a high dividend yield ratio and a stable dividend payout ratio will generally be able to maintain its dividend payment in the future. |
Operating cash flow ratio | The number of times a company can pay off its current liabilities with its operating cash flow.
Operating cash flow ratio = Cash flow from operations / Current liabilities | It can measure a company's ability to cover its current liabilities with cash generated from operations.
A high ratio indicates that a company can well cover its current liabilities and is in good financial health. |
Market capitalisation (market cap) | Market value of all outstanding shares of a company.
Market cap = Price per share ⨯ Total number of shares outstanding | It is a measure of the company's value. |
Shareholders’ equity | A company's total assets minus its total liabilities.
Shareholders' equity =Total assets – Total liabilities | It is also known as the book value of a company. A company with a positive shareholders' equity will generally be a safer investment choice. |
