Stock Market for Beginners: Must know Financial Ratios Before Investing in a Stock | CA Aleena Rais

Summary

In this informative video, Chartered Accountant Aleena Rais enlightens viewers on six crucial financial ratios for evaluating a company's performance. She explains Earnings per Share (EPS), Price to Earnings (P/E), Debt to Equity, Return on Equity (ROE), Price to Book (P/B), and Current Ratio, detailing their significance and how they can guide investment decisions. Aleena emphasizes the importance of comparing these ratios with industry standards and competitors for a comprehensive understanding of a company's financial health and potential for growth.

Takeaways

• 📈 Earnings Per Share (EPS) is a profitability ratio that measures a company's earnings per share and should show steady growth for a viable investment.
• 💰 The Price-to-Earnings (P/E) ratio indicates whether a share is expensive or cheap by comparing the share price to the EPS, with a high P/E suggesting investor confidence and potential for growth.
• 🏦 The Debt-to-Equity ratio represents the proportion of debt to equity in a company's financial structure, with an ideal balance being around 1:1 to 1.7.
• 🧘‍♂️ Return on Equity (ROE) shows the profit delivered to shareholders as a percentage, highlighting a company's efficiency in using its resources.
• 📚 The Price-to-Book (P/B) ratio compares a firm's market value to its book value, helping to determine if a company's shares are over or undervalued.
• 🔄 ROE and P/B ratios should be considered together; a discrepancy between the two can signal potential issues with a company's profitability or valuation.
• 🤔 Investors should compare financial ratios with industry averages and competitors to assess a company's performance and investment potential.
• 💡 EPS is essential for calculating the P/E ratio and provides insight into a company's profitability and investor sentiment.
• 💼 Equity shareholders are the actual owners of a company and receive dividends only when the company is profitable, unlike preference shareholders with fixed returns.
• 💡 The Current Ratio measures a company's short-term liquidity and ability to pay off current liabilities, with a range of 1.5 to 2 considered appropriate.
• 📊 Financial ratios are interconnected and should be analyzed collectively to form a comprehensive understanding of a company's financial health and investment potential.

Q & A

What is the main topic of the video presented by Aleena Rais?

The main topic of the video is the explanation of 6 key financial ratios that investors should consider when investing in stocks.

What does EPS stand for and what does it represent?

EPS stands for Earnings Per Share, and it represents the earnings of a company attributable to each share held by equity shareholders, excluding the effects of extraordinary items.

Why is it important to compare a company's EPS with its competitors?

Comparing a company's EPS with its competitors helps to determine if the investment in the company is profitable or not, as it provides a relative measure of the company's profitability.

What is the formula for calculating the P/E ratio?

The P/E ratio is calculated by dividing the market price of one share by the EPS (Earnings Per Share) of the company.

How does a high P/E ratio reflect on a company's stock?

A high P/E ratio indicates that the company's stock is expensive or overvalued, but it also reflects investor confidence in the company's future growth and performance.

What does the Debt-Equity ratio measure?

The Debt-Equity ratio measures the proportion of debt (outsider's money) to equity (shareholder's money) in a company's financial structure.

Why is a rising Debt-Equity ratio considered a negative indicator for a company?

A rising Debt-Equity ratio indicates that the company is increasingly relying on debt to finance its operations, which could lead to financial instability and bankruptcy if the company is unable to repay its loans.

What is the difference between EPS and ROE?

EPS (Earnings Per Share) is the profit per share and is calculated on a per-share basis, while ROE (Return on Equity) is the percentage of profit relative to the total equity, showing how efficiently a company uses its equity to generate profit.

What does the Price to Book value ratio indicate about a company's stock valuation?

The Price to Book value ratio indicates whether a company's stock is overvalued or undervalued by comparing its market value to its book value per share.

How is the Current Ratio useful for assessing a company's short-term financial health?

The Current Ratio, calculated by dividing current assets by current liabilities, is useful for assessing a company's ability to pay off its short-term debts and meet its immediate financial obligations.

What should an investor consider when evaluating a company's financial ratios?

An investor should consider the company's ratios in comparison to industry averages and competitors, as well as the overall trend and stability of these ratios over time, to make informed investment decisions.