How To Use Financial Ratios To Make Better Decisions
Financial Ratios help you evaluate a company. Most financial ratios will show you how much money you're paying for a specific piece of the business. Let us give a few examples:
Price-to-Sales Ratio = Market Cap / Sales
The Price-To-Sales ratio or PS ratio tells you how expensive a company is relative to its total sales. The formula is calculated in two different ways: divide the company's market capitalization by its revenue or divide the current stock price by revenue-per-share. Because this ratio is being calculated with live price information, you can also watch it in real-time on the chart as we've shown in this example above.
If a company has a market cap of $10 billion and revenue of $1 billion, well that, that implies a PS ratio of 10. You're paying $10 for every $1 in sales. You can do ratios like this for all aspects of the company. For example, PE ratio or Price-To-Earnings ratio measures the Market Cap / Earnings . This tells you how much you're paying for every dollar of earnings .
Keep in mind that Financial Ratios are not perfect. They are also not a buy or sell recommendation. Instead they are shortcuts, ways to quickly evaluate a company, compare its underlying fundamentals, and study that company relative to other companies. You also must remember that financial metrics can change quickly with a single earnings report. A company's future expectations are also just as important. A company like Apple might have a high PE ratio, but if they're building and growing revenue into the future, their PR ratio could come down over time.
$Apple(AAPL.US$
$Apple(AAPL.US$
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kradic34 : What does financial ratio mean...