INVESTMENT STRATAGIES - Financial Ratio Values.

Financial Ratio Values.


• Compare with the industry average. 25% above might suggest
that it is the clear leader.
• If Earnings Growth rate is greater than PE, could be a sign it is
undervalued.
• To set a Price Target multiply current PE by the Consensus
Earnings estimate.
• Check its PE range to see if it is over- or undervalued.


PEG
• Less than 1 would suggest that it might be undervalued.
Greater than 2 suggests that it is overpriced.

PCF
• A low figure is attractive. It should be lower than the PE.
A low PCF is good for dividends. It ensures that earnings are real.

PSR
• A low figure is good, preferably less than 1.
O’Shaughnessy sets a maximum at 1.5 and Markman at 4.
• It is good for recovery/turnaround potential.
• Watch out if the company is highly geared.

PBV
• A PBV less than 1 represents good value.
• A very low PBV can point to a takeover.

PTBV
• Same as above with intangible assets subtracted.

PRR
• A single digit figure is best for the Price to Research Ratio.

Revenue Growth
• Sales growing faster than its industry is good,
suggesting a competitive advantage.

Earnings Growth
• 15% is very good. Good sign if earnings accelerating faster
than revenue.

Profit Margin
• Improving margins give a competitive edge.
• Varies by industry- 15% might be good in one industry -
software is high and retail is low.
• Too high a margin can invite competition.

Relative Strength
• Measures a share’s performance relative to the market.

Gearing
• A Debt to Equity Ratio of 50% or lower is good.
• A declining ratio is a good sign. It falls when a company
pays off debt.
• ROCE should be higher than the cost of borrowing, profits
should be rising.

Current Ratio
• Current Assets divided by Current Liabilities.
• Measures short-term debt paying ability.
• It should be 2 or higher, but restaurants can carry 1.0.
• Supermarkets could survive on less than 0.5

Quick ratio
• Current Assets minus stocks divided by Current Liabilities.
• Should be 1 or better. Harder test than Current Ratio.
• Sign of a solid conservatively run business.

Interest Cover
• It should be 2*, but the higher the better. Deteriorating figure is bad.

Leverage Ratio
• Total Assets divided by Total Equity.
• A number lower than its peers is good.

ROE
• A double-digit figure is good. A value play would need 15%.
20% is excellent. 26% is the gold standard.
• A climbing ROE leads to a climbing share price.

ROCE
• A high ROCE means efficient use of resources.
• It should be greater than 20%.
• It should be higher than the return on gilts.
• Compare to sector peers.

ROA
• Net Income / Total Assets
• Useful ratio in banking and manufacturing.
• Look for a rising trend.
• Compare to industry peers.

Dividend Cover
• EPS divided by DPS.
• A measure of a company’s ability to maintain its dividend.
• It should be a minimum of 2*.

Stockturn
• A measure of how fast a company sells its goods.
• The higher the figure, the leaner the company.