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Key Financial Metrics for Stock Investment Analysis (ROE/PER/PBR/EPS/BPS)

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When investing in stocks, understanding a company's financial performance and condition is essential. Various financial metrics, from basic indicators like Revenue, Operating Profit, and Net Profit to more advanced measures like ROE, PER, and PBR, help investors evaluate a company's financial health and growth potential. Below is a detailed explanation of these key metrics.

1. Revenue (Sales)

  • Definition: Total income generated from the sale of goods or services.

  • Significance: Indicates the company’s market competitiveness and growth potential. Consistent revenue growth signifies business expansion.

  • Example: A 20% increase in revenue suggests increased market share or sales efficiency.

2. Operating Profit

  • Definition: Profit generated from core business operations after deducting operating costs.

  • Significance: Reflects the efficiency of the company’s core operations.

  • Example: Rising operating profit shows efficient cost management and stable operations.

3. Net Profit

  • Definition: Final profit after deducting all expenses, taxes, and interest from operating profit.

  • Significance: Represents funds available for dividends or reinvestment.

  • Example: Increased net profit signifies improved overall financial health.

4. Operating Profit Margin

  • Definition: Ratio of operating profit to revenue.

  • Significance: Measures how efficiently a company converts revenue into profit.

  • Formula: (Operating Profit ÷ Revenue) × 100

  • Example: A higher operating profit margin indicates effective cost management.

5. Net Profit Margin

  • Definition: Ratio of net profit to revenue.

  • Significance: Reflects the company’s ability to generate profit from revenue.

  • Formula: (Net Profit ÷ Revenue) × 100

6. ROE (Return on Equity)

  • Definition: Ratio of net profit to shareholders’ equity.

  • Significance: Evaluates profitability relative to shareholder investments.

  • Formula: (Net Profit ÷ Shareholders' Equity) × 100

  • Good Benchmark: Above 10% is generally considered attractive.

7. Debt Ratio

  • Definition: Ratio of total debt to shareholders’ equity.

  • Significance: Assesses the company’s financial leverage and stability.

  • Formula: (Total Debt ÷ Shareholders' Equity) × 100

  • Example: A debt ratio below 100% suggests strong financial stability.

8. Quick Ratio

  • Definition: Ratio of quick assets (current assets minus inventory) to current liabilities.

  • Significance: Measures short-term debt repayment capability.

  • Formula: (Quick Assets ÷ Current Liabilities) × 100

  • Good Benchmark: A ratio above 100% indicates good liquidity.

9. Retained Earnings Ratio

  • Definition: Ratio of retained earnings to capital stock.

  • Significance: Shows how much profit the company retains for reinvestment.

  • Formula: (Retained Earnings ÷ Capital Stock) × 100

10. EPS (Earnings Per Share)

  • Definition: Net profit divided by the number of outstanding shares.

  • Significance: Indicates profitability per share for shareholders.

  • Formula: Net Profit ÷ Number of Shares

  • Example: Higher EPS reflects better shareholder returns.

11. PER (Price to Earnings Ratio)

  • Definition: Ratio of current share price to EPS.

  • Significance: Assesses whether a stock is overvalued or undervalued.

  • Formula: Share Price ÷ EPS

  • Interpretation: Lower PER indicates undervaluation; higher PER suggests overvaluation.

12. BPS (Book Value Per Share)

  • Definition: Net assets (assets minus liabilities) divided by the number of shares.

  • Significance: Reflects the intrinsic value of a share based on company assets.

  • Formula: (Assets - Liabilities) ÷ Number of Shares

  • Example: Higher BPS suggests stronger asset value per share.

13. PBR (Price to Book Ratio)

  • Definition: Ratio of share price to BPS.

  • Significance: Evaluates stock price relative to the company’s asset value.

  • Formula: Share Price ÷ BPS

  • Interpretation: Lower PBR indicates undervaluation relative to assets.

14. Dividend Yield

  • Definition: Ratio of dividend per share to current share price.

  • Significance: Reflects the return on investment from dividends.

  • Formula: (Dividend Per Share ÷ Share Price) × 100

  • Example: Higher dividend yield indicates better returns from dividends.

15. Dividend Payout Ratio

  • Definition: Percentage of net profit paid out as dividends.

  • Significance: Shows how much of earnings are distributed to shareholders.

  • Formula: (Dividends ÷ Net Profit) × 100

  • Example: High ratio implies a shareholder-friendly dividend policy.

Conclusion

These key financial metrics are essential for evaluating a company's financial performance and growth potential. By understanding and applying these indicators, investors can make more informed decisions and better assess the value of their investments.