What are the Key Financial Ratios?

What does Market Capitalization mean?

Formula: Market price * Outstanding shares

Market capitalization is the total market value of all the company’s outstanding shares. It is calculated by multiplying the company’s total outstanding shares by the current market price of stock. This figure is used to determine the company’s size compared to sales or total asset figures. Based on the market capitalization stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively.

What does Book Value per share Means?

Formula: Net worth / Number of outstanding shares.

Book value of a share enables us to compare the market value and understand whether or not the stock in overvalued or undervalued. In a bull run you would find the stock to trade significantly higher than the book value. However in a bear phase the stock market value would either be close to book value or under the book value. If stock price is under the book value than it means that the company is undervalued and might be an attractive buy.

What does Return on Capital Employed (ROCE) Means?

Formula: EBIT / Capital Employed *100

ROCE ratio gives us an idea about the efficiency and profitability of a company’s capital investments. Higher the ROCE is always better as it needs to be above the rate at which the company borrows. A rise in borrowing cost would impact the ROCE and there by reduce shareholders’ earnings. In order to find the average ROCE one needs to take the average of opening and closing capital employed for the time period.

What does Return on Equity (ROE) Means?

Formula: PAT / Net worth

ROE is also known as Return on Net worth. ROE is total returns which the equity shareholders get out of the total net earnings of the company. It measures the company’s profitability by revealing how much profit a company generates with the money shareholders have invested. Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Net worth does not include preference shares.