Some Fundamental Ratios That Can Give You A Good Idea On Just How Strong A Company Is PDF Print E-mail
Written by Shaun Rosenberg   
Sunday, 03 October 2010 18:20
One of the most important things to consider when investing into the stock market is, which companies are actually worth investing into. It is easy to say buy strong company's well how do you gage that?
by ShaunRosenberg


One of the most important things to consider when investing into the stock market is, which companies are actually worth investing into. It is easy to say buy strong company's well how do you gage that?

One of the ways is by simply looking at the company itself and trying to determine if the company actually has demand and is worth looking into.

Another way is to use financial ratios to tell just how stable the financials behind a company are and how cheap the stock is. Here are some financial ratios you can take into consideration next time you are doing your own research.

1. The PE Ratio

The PE ratio stands for price to earnings ratio. As the name suggest it compares the price of the stock to the earnings of the company. This gives you an accurate estimate on how fairly priced the stock is for what it is backing. You can then use this ratio to compare a company with other companies.

For example if the stock that you are looking at has a PE ratio of 8 and the average for companies in that industry group is 12 then you know it is a cheap buy when compared to its competition. If another company in that same industry group has a PE ratio of 18 then you know it is expensive when compared to its competition.

2. Asset Test Ratio

The quick ratio is a ratio that tells you how well prepared the company is to meet its long term financial obligations. Any company with a quick ratio below 1 is considered to be higher risk because their assets do not cover their liabilities if they ever needed to.

3. Solvency Ratio Formula

This ratio is similar to the quick ratio as it looks at a company's debt and their assets. But unlike the quick ratio there is no standard to what is good and what is bad. Instead the ratio can be compared with other companies in the same industry in order to tell if the company has too much debt compared to its peers or if it has very little debt compared to its peers.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

For more fundamental ratios read this article on a variety of different ratios Free reprint avaialable from: Some Fundamental Ratios That Can Give You A Good Idea On Just How Strong A Company Is.