10 Key Financial Metrics Every Investor Should Know

Introduction

Retail investor participation in India’s financial markets has surged over the past few years, attributed to the emergence of online trading platforms that have revolutionised stock trading today. More than half of the active clients of the National Stock Exchange (NSE) come from online discount brokerages such as Zerodha, Shoonya by Finvasia, Upstox, Groww, and many others. The opportunity for wealth-creation offered by the trading sector is a key reason in these developments, but navigating the complex world of stock trading can be difficult for new and first-time investors.

Here, we take a look at some of the key financial metrics every investor should incorporate into their analysis that can enhance decision-making and lead to better outcomes in the stock market:

Price-to-Earnings (P/E) Ratio

This fundamental metric measures a stock’s valuation relative to its earnings. A lower P/E ratio can indicate an undervalued stock, while a higher ratio suggests overvaluation. It is a useful metric for comparing companies in the same industry, and with similar grown expectations.

Earnings Per Share (EPS) 

EPS reflects a company’s profitability and is crucial for assessing its growth potential. Rising EPS is often a positive sign. Similar to the previous metric, earning per share provides the most valuable information when compared against competitor metrics, companies of the same industry, or across a period of time.

Price-to-Book (P/B) Ratio

P/B ratio reveals how a stock’s market value compares to its book value, making it a gauge of asset-based value. The book value can be defined as the difference between the book value of assets and the book value of liabilities, and a company with a high P/B ratio indicates that the stock price is overvalued, while a lower P/B could mean that the company is undervalued.

Dividend Yield

Displayed as a percentage, the dividend yield is the amount of money paid by a company to its shareholders for owning a share of its stocks divided by its current stock price. A high dividend yield suggests a stock’s potential for generating income, which is especially valuable for income-oriented investors.

Return on Equity (ROE)

ROE measures a company’s ability to generate profits from shareholders’ equity. Return on equity is a gauge of a company’s profitability, and can tell an investor about how efficiently it generates those profits. A higher ROE is generally desirable.

Debt-to-Equity Ratio

This indicates a company’s leverage and its financial stability. It depicts how much debt a company has compared to its assets, and is calculated by dividing a company’s total debt by total shareholder equity. A lower ratio is often preferred for safety.

Current Ratio

An indicator of a company’s short-term liquidity, the current ratio should ideally be greater than 1, ensuring the company can meet its short-term obligations. This particular ratio is useful for investors as it allows them understand how a company can maximise the current assets on its balance sheet to satisfy its current debt and other payables.

Operating Margin

It is a key measure in analysing a stock’s value, and refers to the percentage of revenue a company generates that can be used to pay the company’s investors, along with paying taxes. A high operating margin reflects efficient cost management and robust profitability.

Growth Rates

The growth rate of a stock is the percentage change in its value over time, measured over different periods such as days, weeks, months, quarters or years. Keep an eye on revenue and earnings growth rates to gauge the potential for future returns.

Beta

Beta measures a stock’s volatility compared to the overall market. A higher beta implies greater risk and potential rewards.

Conclusion

Finding success in the financial markets is no easy tasks, but these metrics can serve as a foundation for informed investment decisions in India’s stock market. By understanding these financial indicators and incorporating them in their overall strategy, investors can navigate the complex world of stocks with confidence, positioning themselves for long-term success.