Key Ratios For Fundamental Research – Part – 2

Debt-Equity Ratio (DER)

Debt-Equity Ratio = Total Debt/Total Equity Debt-Equity Ratio shows the proportion of assets provided by the borrowers and owners of the company.

• Look For– Low and decreasing DER
• Compare– With its past performance and within same industry
• Industry– Capital intensive industries such as infrastructure, capital goods, oil & gas, metals

Let’s learn to choose better company in the same business by comparing their financials:

Both the companies mentioned above are engaged in the business of power generation & distribution. Among them, Tata Power has more aggressively financed its growth with debt which can result in volatile earnings and additional interest expense.

Earning Per Share (EPS)

Earning Per Share = (Net Income – Preference Dividend)/Weighted Average Number of Shares Outstanding

Earning Per Share is that portion of company’s profit which is allocated to each outstanding share. The earning per share is a useful measure of profitability as investors usually look for companies with steadily increasing earnings per share. Growth in EPS is an important measure of management performance because it shows how much money the company is making for its shareholders.

• Look For– Increasing EPS
• Compare– With its past performance
• Industry– All Industries

Let’s learn to choose a better company in the same business by comparing their financials:

Earning Per Share of ITC is steadily increasing which shows good management performance.

Price to Earning Ratio (PER)

Price to Earning Ratio = Current Share Price/Earning Per Share

Price to Earning Ratio tells how much investors are willing to pay for a stock based on its current earnings. In absence of capital appreciation (in the amount invested), P/E ratio indicates the number of years it will take for you to get back your initial invested amount in the form of returns.

• Look For– Low PER
• Compare– With its past performance and within same industry
• Industry– FMCG, IT, Pharma

Let’s learn to choose better company in the same business by comparing their financials:

Both the companies mentioned above are personal care companies. But Emami is looking cheaper comparatively from valuation point of view.