This three are the most important ratios of consequence in any analysis.
- EPS (Earnings Per share): Earnings per share as the name suggests is how much a shareholder earns per share he owns or in other words, how much a company earns per share. Higher the EPS better is the companies profitability, however it must be kept in mind if this is sustainable over the period of time based on the company and the sector. If not sustainable the script may be overpriced and may see corrections in the upcoming quarters.
- P/E Ratio: According to fundamental analysis, the lower the P/E ratio the more likely the script is approaching its bottom. A standard comparison value normally used is 20. If the P/E ratio is below 20, the script is NOT overbought and you can still afford to buy it. However if P/e is above 20, this may not be sustainable and a correction in the price of the script cannot be ruled out. However 20 is only a relative value fixed, kindly note that it cannot be used as an absolute referance.
- Dividend Payout Ratio: This ratio normally shows the relationship between earnings of the company and the amount finally paid in the form of dividend. when this ratio is subtracted from 100, the consequent value gives the investor an idea as to how much the company retains as profits and how much it reinvests. A company that retains profit more often is likely to payout dividends more often leading to investors purchasing the script close to the record date leading to a consequent rise in script value. The script may correct post payout of dividend. However a company which reinvests is likely to have a steady rise in script price subject to the reinvestment being efficiently channeled in to building future profitability. It is here that trust in the board of directors and management plays a critical role in determining script quality.
Thus provided above are some of the most basic ratios. This will give a rough idea to investors to determine the ideal script the next time you get a recommendation, Please note information for the above may be procured on sites like BSE, NSE and so on....
