9 ratios to check before buying a stock

There appears to be a rush to open new demat accounts and the daily volumes on the cash market crossed the Rs 1 lakh crore mark on 31 August. However, new investors should know the basic ratios used to value stocks before they jump in. ET Wealth explains how to use these tools.PE = Share price/Earnings per share (EPS)What does it tell you?What the market is willing to pay for a stock based on its past or future earnings. Lower the PE, cheaper the counter.Good to knowUsually, the market gives higher multiples to companies and sectors with less volatile earnings stream and higher growth rates. 77945386PEG = PE/Expected earnings growth in %What does it tell you?It indicates the relation between a company’s market value and its projected earnings growth.Good to knowSince this ratio tries to correct a limitation of PE ratio, it can be used across sectors. PEG below 1 means a stock is undervalued while over 1 means it is overvalued. 77945393P/CF = Share price/Cash flow per share(CFPS)What does it tell you?It compares a company’s market value to its cash flows. Since non-cash expenses like depreciation, amortisation, etc are excluded, this is a more stable valuation indicator than earnings.Good to knowLow P/CF means the counter is cheap. Sectors and companies with higher growth command a higher premium. 77945426EV/Ebitda = Enterprise value (EV)/ Earnings before interest, tax, depreciation and amortisation (Ebitda)What does it tell you?How much (or how many times) you need to pay for a stock's Ebitda. Lower the ratio, cheaper the stock.Good to knowEV stands for market cap + debt and this ratio is useful for companies with large debt. Since total capital is used as numerator and denominator is the more stable Ebitda, this ratio can be used across industries. 77945396PB = Share price/ Book value per share (BVPS)What does it tell you?Compares a company’s current market price to its book value. Low PB means the counter is cheap.Good to knowMore useful in periods like now, because BVPS is more stable than EPS. PB is more suited to sectors where the book value is marked to market on a regular basis and not for companies with high brand value. 77945431Dividend yield = (Dividend per share (DPS)/ Share price) X 100What does it tell you?This ratio measures how much dividend you will get as a % of its current share price. A higher ratio is betterGood to knowInvestors should consider normal dividend and not special dividends while computing this ratio. 77945408Market Cap/Sales = Market cap/Sales or revenuesWhat does it tell you?How much (or how many times) you need to pay for the stock’s revenue. Lower ratio indicates cheaper stock.Good to knowSince revenue is more stable than earnings, the chance of manipulation is less with this ratio. However, different industries will have different margins and therefore, compare only within industries. 77945414EV/Sales = Enterprise Value/Sales or revenuesWhat does it tell you?Compares the total value of company to its sales. Lower ratio means the counter is cheap.Good to knowSince sales are generated using entire capital, including debt, this gives better picture than price / sales ratio. Comparison should be within industry. 77945418EV/Capacity = Enterprise value (EV)/Total capacityWhat does it tell you?This measures how much you need to pay per unit (For example, 1 MW of power, 1 million tonne of cement, etc). Compare only within industries. A lower value is better.Good to knowThis ratio is used by acquirers but can be used by retail investors too.Data as on 31 Aug. Compiled by ETIG Database

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