11 ratios that help us to decide whether to buy a stock or not

(1) Price to Earnings ratio (P/E ratio)

Formula: P/E ratio = Market Cap/Net Profits (TTM)

Interpretation: A simple way to judge if a stock is a good deal is by looking at its P/E ratio. If it's lower than 25, it's generally considered a good value. It's also helpful to compare a company's P/E ratio to the average for its industry. For a company with a 10-year history, comparing its current P/E to its own 10-year average can be a smart strategy.

(2) Price to Book Value ratio (PB ratio)

Formula: PB Ratio = Share Price/Book Value of Share

Interpretation: A PB ratio over 1 means the market price is higher than the company's value, possibly showing it's overvalued. A low PB ratio means the market expects less from the company. A PB ratio under 1 suggests the stock might be a good deal because it's priced lower than the company's value.

(3) PEG Ratio

Formula: PEG Ratio = (P/E Ratio) / Projected Annual Growth in EPS

Interpretation: The PEG ratio helps determine if a stock is a good deal. If the ratio is low (under 1), the stock may be undervalued; if it's high (above 1), the stock may be overvalued. It's useful for comparing different stocks.

(4) Price-to-Sales Ratio

Formula: Price to Sales Ratio (P/S) = Market Cap / Total Annual Revenue

Interpretation: Professional investors prefer a low P/S ratio because it means they're paying less for each ₹ of a company's revenue. A high P/S ratio suggests investors are paying more for each ₹ of revenue, but it's hard to say what's high since it varies by industry. So, it's best to compare a company's P/S ratio to the industry average.

(5) Debt to Equity Ratio

Formula: Debt-to-Equity Ratio = Total Debt / Total Equity

Interpretation: A Debt-to-Equity Ratio should ideally be less than 0.5 for health. When investing, avoid companies with a ratio above 2. Look for ratios close to zero or very low when choosing where to invest.

(6) Current Ratio

Formula: Current Ratio = Current Assets/Current liabilities

Interpretation: Current assets are things a company owns that can be turned into cash in a year, and current liabilities are debts that need to be paid within a year. A healthy current ratio, equal to 1, shows if a company can cover its debts without selling fixed assets, which can hurt its reputation and stock price.

(7) Interest Coverage Ratio

Formula: Interest Coverage Ratio = Earnings Before Interest and Tax (EBIT)/ Interest

Interpretation: An interest coverage ratio of 1.5 is good for a company. A higher ratio means the company can easily pay its loan interest, lowering the risk of financial trouble. A lower ratio suggests more debt and a higher chance of bankruptcy, making it harder for the company to get loans.

(8) Dividend Yield Ratio

Formula: Dividend Yield Ratio = Dividend Per Share* 100/ Current Share Price

Interpretation: If a company's stock costs Rs. 100 and it pays a Rs. 20 annual dividend per share, the dividend yield is 20%. This means shareholders earn Rs. 20 in dividends for every Rs. 100 the stock is worth. A higher dividend yield is better for investors who want a steady income from dividends over time.

(9) Inventory Turnover Ratio

Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Interpretation: A good inventory turnover ratio is between 5 and 10 for most industries. A low turnover ratio means sales are slow and there's too much inventory. A high turnover suggests fast sales or not enough inventory. Inventory turnover measures how quickly inventory is sold and replenished.

(10) Assets Turnover Ratio

Formula: Total Asset Turnover = Net Sales / Total Assets

Interpretation: An asset turnover ratio of more than 1 is generally considered good. A high asset turnover ratio shows your company makes good revenue from its assets, meaning it's productive and doesn't waste much. A low ratio suggests the company isn't great at using assets to make money.

(11) EV/EBITDA

Formula: EV/EBITDA = Enterprise Value ÷ EBITDA

Interpretation: A good EV/EBITDA ratio for a company is under 10. If a stock has a lower ratio than its peers, it's a good deal. If the ratio is higher than its peers, the company might be overpriced.