Stock Investing: Fundamental Analysis Using Key Ratios

  • Management
  • Financial Health
  • Efficiency
  • Stock Valuation

Evaluating a company’s management

  • Return on Invested Capital (ROIC): This ratio is considered as an ultimate gauge of a company’s profitability. It tells you how much money the company makes on all the money, including both debt and equity, that has been entrusted to it. For instance, in 2017, Cisco (CSCO) had an ROIC of 9.62. This information can be found under the section Key Ratios -> Profitability at http://financials.morningstar.com/ratios/r.html?t=0P0000019Y&culture=en-US&platform=sal
  • Return on Assets (ROA): This ratio tells you a company’s ability to turn assets into profit. It measures the profitability a company achieves on all of its assets, regardless if they are financed by equity holders or debt holders. For instance, in 2017, CSCO had an ROA of 7.64. This information can be found under the section Key Ratios -> Profitability at http://financials.morningstar.com/ratios/r.html?t=0P0000019Y&culture=en-US&platform=sal

Evaluating a company’s financial health

  • Debt-to-Equity: This ratio is the most basic measure of a company’s debt load and tells you how a company’s debt compares to the amount of money it has raised from stock investors. In 2017, CSCO had a debt-to-equity ratio of 0.39, that means, for every $1, the company has a debt of $0.39. This information can be found under section Key Ratios -> Financial Health at http://financials.morningstar.com/ratios/r.html?t=0P0000019Y&culture=en-US&platform=sal
  • Quick Ratio: This ratio tells you how well-equipped a company is to handle its short-term cash obligations after disregarding company’s inventory. In 2017, CSCO had a quick ratio of 2.92, that means, the company has $2.92 in assets that are already cash or can be easily turned into cash to handle liabilities due in a year. This information can be found under section Key Ratios -> Financial Health at http://financials.morningstar.com/ratios/r.html?t=0P0000019Y&culture=en-US&platform=sal
  • Interest coverage ratio: This ratio helps you figure out how well a company is able to afford its interest payments with income earned from the company’s primary source of business. In 2017, CSCO has an interest coverage ratio of 15.27. This information can be found under section Key Ratios -> Profitability at http://financials.morningstar.com/ratios/r.html?t=0P0000019Y&culture=en-US&platform=sal

Evaluating a company’s efficiency

  • Accounts payable turnover: Accounts payable turnover is important because it measures how a company manages paying its own bills.

Company’s stock valuation

  • Price-to-Earnings (P/E) Ratio: This is the granddaddy of all financial ratios because it is relatively easy to understand and can be used to compare the valuations of different companies with each other and to the market at large. In 2017, CSCO had a P/E of 19.95. This information can be found under Valuation at http://www.morningstar.com/stocks/xnas/csco/quote.html
  • Price-to-book (P/B) Ratio: This ratios compares a company’s stock price to its book value, or value of everything the company owes, free and clear of debt. Here’s how you calculate P/B ratio, P/B ratio = Company’s stock price/ (Shareholder’s equity/Number of shares outstanding). In 2017, CSCO had a P/B ratio of 2.89. This information can be found under Valuation at http://www.morningstar.com/stocks/xnas/csco/quote.html.

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