Financial performance of companies: a guide for beginners | R Blog RU



When trading financial markets, especially the stock market, it is useful to have information about financial indicators companies. Reports for the analysis of the market situation are used not only by beginners, but also by the “sharks” of the market.

For those who have recently come to trade, it will be useful to study data about companies and their financial performance for the reporting periods. As a rule, companies provide reports for the quarter, half year and year. At the same time, for intraday trading, financial indicators can be ignored, but for medium and long-term investments, reports and financial indicators affect investment decisions.

Next, we will consider each of these indicators and tell you how their values ​​affect the choice of certain stocks.

Price / Earnings

Price / Earnings (P / E) – a multiplier showing the investor the ratio of the price per share to the annual earnings per share. Using P / E, the investor estimates the period for which the funds invested in the company will pay off.

  • The P / E multiple can be used to select a company with overvalued or undervalued shares.
  • A low P / E value means quick payback.
  • Applies only to companies making a profit.

We talked about P / E in detail in this article:

Price / Sales

Multiplier P / S (Price / Revenue) shows the ratio of the company’s total value to its annual income (revenue).

  • A company with a P / S equal to or less than 2 is considered to be an interesting investment.
  • Ideally, this multiplier should be equal to one. The unit indicates that, taking into account the current profit, the funds invested in the company will pay off in one year.
  • The P / S multiplier, unlike P / E, is applicable to unprofitable companies.

Price / Cash Flow

Price / Cash Flow (P / CF) Is the ratio of the asset price to the company’s cash flow, taking into account depreciation costs, capital expenditures and working capital. The calculation is made by dividing the market capitalization by the cash flow from the completed market transactions.

P / CF values ​​are usually considered as follows:

  • P / CF more than 20 – the company is not doing well.
  • A P / CF of 20 to 15 is considered positive.
  • P / CF less than 15 – the company is in great shape.

Capitalization / Equity (Price-to-Book)

P / B ratio or P / BV (Price-to-Book Value) shows the value of the assets owned by the company minus liabilities (debts, expenses) that can be realized in the event of liquidation. This coefficient refers to exchange multiples and shows how attractive a company is for investment and the degree to which its shares are overvalued on the market. If underestimated, the company’s shares have an opportunity for growth.

  • The lower the P / BV, the higher the upside potential of the stock.
  • This ratio is best used in conjunction with other multiples, since it does not take into account the company’s future income.

Price / Earnings to Growth

PEG Is a simplified P / E multiplier. It is calculated taking into account the forecasts of the company’s growth rate and shows the overvalued or underestimated value of the company at the current moment, taking into account the development prospects.

  • With the help of PEG, companies are found with a high value of domestic assets, but undervalued in the market.
  • In the future, the shares of such a company will go up.

Current Ratio

Current liquidity ratio – the current amount of assets divided by the total liabilities of the company. Simply put, this is an indicator of the financial stability of a company, which speaks of the ability to pay off its short-term liabilities with short-term assets.

  • The indicator in the range from 1.6 to 2 indicates the attractiveness of the company for investors.
  • An indicator equal to one indicates the possibility of repaying short-term obligations without a balance.
  • In the current liquidity ratio it is necessary to take into account the scope of the company due to the differences in the “norm” of this indicator in different sectors.

Capitalization

Capitalization – the total value of the company in the market. It is calculated by multiplying the number of the company’s shares in circulation by the current value of one share. The capitalization indicator changes with the change in the share price and may not coincide with the real value of the company. Market capitalization often changes due to active trading or speculation on the exchange.

Debt-to-Equity

Debt to equity ratio (D / E) is the ratio of the company’s current borrowed funds to the shareholders’ equity. Like the current ratio, the D / E ratio differs from industry to industry, so it is incorrect to compare this indicator between an electric car manufacturer and, for example, an online service provider.

  • A too low value of this ratio indicates that the company is ineffectively using borrowed funds to increase its profitability.
  • If the value is too high, the organization demonstrates the potential loss of its financial independence and the instability of its position.

COGS (Cost of Goods Sold)

COGS – the cost of products or services sold. Includes all costs for the purchase of raw materials, processing, production and the path of the final product to the consumer. COGS is influenced by raw material purchase prices, season, region, or weather conditions. For example, the price of oil affects the cost of fuel for carriers, which affects the final cost of services to the consumer. An increase in transportation prices will negatively affect the cost of travel services and so on.

Return on assets

ROA – return on assets or profit received per monetary unit (dollar). It characterizes the efficiency of the company’s management. The multiplier is used when comparing competing companies and shows the efficiency of using assets for profit. The calculation is made by dividing the net profit by all assets. Average values ​​depend on the field of activity (industry) in which the organization operates.

Return on equity

ROE indicator – return on equity – is the ratio of equity to the profit received to the total share capital reflected in the balance sheet. For example, if the ROE is 23%, this means that every $ 100 of equity in the company is generating $ 23 in profit. The higher the indicator – the higher the profitability – the higher the attractiveness of the company’s shares.

For more information on the ROE itself and how to calculate it, you can find in this article:

Working capital per unit of profit

Working capital per unit of profit – means used on a daily basis (cyclically) in the production of a product or service. The working capital ratio is used in the comparative analysis of competing firms operating in the same sector and according to the same principles. The faster the turnover, the greater the opportunity for profit.

Conclusion

Analyzing financial indicators does not require complex calculations, as it was before the spread of computers. Most of the financial indicators are published on the official websites of companies in the sections for investors.

After analyzing the indicators and comparing them with similar ratios from competing companies, they choose a suitable asset for investment. To simplify the analysis, they use open Internet resources that provide information on company reports and the calculation of multipliers.

It is inappropriate to apply all indicators to companies operating in non-related business areas. Experienced investors form an investment portfolio based on a comparison of competing companies.


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