Top 5 Most Important Financial Ratios for Stock Investors

Investing in stocks is a riskier way of earning profit. Large profits can be made if the decision is made correctly. This risk can be minimized by making good estimates about the stocks. For making these estimates financial statements and the earnings are not enough, as financial statements are not easy to interpret and earnings shown can be controlled by various accounting techniques. In this situation, financial ratios can prove to be very handy and optimum profit from stocks is only possible through analyzing them correctly. Financial ratios give in-depth understanding of the financial statements and the true financial position of the company, which in return makes the decision making easier for the investors. Following are the 5 most important financial ratios for the stock investors.

Dividend yield ratio

Dividend yield ratio is the ratio of dividend paid by the company annually to its share price. It actually shows that how much cash flow you can get for each dollar invested in the equity. It can also be termed as investors’ return. Investors can use this ratio in two ways. First they can check which stock is better to invest as sound companies have higher dividend yield ratio while progressing companies have comparatively lower ratio. Secondly investors can get information about the returns they are getting on the stocks they have invested in.

Price earning ratio

Price to earning ratio is the ratio of market price of the share to its earning. Earning per share (EPS) used in this ratio is calculated in different ways. Mostly it is calculated from the last four quarters. This ratio shows the expectation of the investors about the stock, the higher the PE ratio the higher the expectation for the stock to be profitable. This ratio alone is almost meaningless, unless it is compared with the PE ratio of the other companies of the same industry. Investors can analyze by comparing the PE ratios of the companies of any industry. And they can make profitable decision by investing in the stocks with higher price earning ratio. PE ratio of a company can also be compared with the historical PE ratio of the same company. It would show the progress of the stocks of that company in the exchange. If the ratio is increasing by time, it means that expectation and willingness of the investors to invest in the stock are increasing with the passage of time.

Earning per share ratio

This ratio can be calculated by dividing net income earned in the given period of time by the total number of shares outstanding in the same period. Usually weighted average of the number of shares outstanding is used in the formula. This ratio is the profitability of the company per unit of the ownership of the shareholder. While analyzing investors should keep in mind that earnings shown by the company could be doubtful, due to accounting changings. If the earnings are not real then this ratio is not a good measure.

Dividend payout ratio

It is the percentage of the earnings which are paid by the company to its investors in the form of dividend. This ratio is in real the measure that how much the company is paying back to its stockholders. Dividend payout ratio is more useful for the investors, who are willing to do a long term investment in stocks. Mature and stable companies have higher payout ratio as compared to other companies of the industry.

Debt to equity ratio

Debt to equity ratio is calculated by dividing liabilities by the equity of shareholders. This ratio shows that how much equity the company is investing for its assets. Higher ratio shows that the company is investing largely for the long term plans and it has sound future prospects.

My Name is Ammad Hafeez and I’m writing for last 5 years for different newspapers and websites on variety of subjects i.e. Finance, Investments, Business, Politics and Sports

How to Outline Your Financial Goals

People save and invest to improve their quality of life. However, it is easy to make mistakes that can cause stress and cost you money. You can avoid those mistakes and keep your investment on track by outlining your financial goals.

It is a common investment mistake for investors to have no idea why they are investing. So, you should ask yourself…

Why are you investing?

Do you know why you are investing? What are you going to do with your money? What is most important in your life?

“Making money” is not a good enough reason to invest. How do you see yourself spending your money in a year? Five years? Ten years? If you can clearly explain your goals, you have taken the first step toward making your own investment plan.

With that in mind, write down your financial goal. One simple sentence is all you need. For example, you can write “buy a home”, “pay for college,” “start a business,” or “retire as a millionaire!”

Next, write down the amount of money you think you will need to accomplish your goals.

Don’t worry about trying to fit in every little cost. You can always revisit your target later when you check your performance. Focus on your goal, and try to write down a target number.

This number will be different depending on your goal. For example, maybe you’re buying a $100,000 home, you may want to save $10,000 for a down payment. Maybe you need $5,000 to start a business or $50,000 to pay for college. If you don’t have much money to invest, you can make up for it by investing over a long period of time.

Finally, consider the importance of your investment goals. How important is your retirement, your kid’s college tuition, or your down payment on a house? The importance of your investment will give you an idea of your risk level.

Every investment has risks.

You don’t want to take too many risks. However, you need to take some risks to earn a reasonable return. Also consider the amount of time you will be invested. If you have more time to invest, you may be able to take risks and still catch up if you run into trouble.

Ask yourself if you are ready to invest before you move on. Be honest with yourself.

You may not need to invest your money. Would you be better off paying off your debt? Can you afford to just save your money rather than invest it? Make sure you can commit enough money and time to investing.

It is important to stay motivated toward your goals and keep them in mind when you invest. Every investment decision you make should move you closer to your goals. You should be willing to learn, improve, and work toward your goals as you invest.

If you can stay committed and keep that motivation toward your investment goals, you are much more likely to succeed!

A. Michael Hayes, Jr

You can learn more about how to achieve your financial goals at my website, Great-Mutual-Funds.com.

A. Michael Hayes, Jr is a mutual fund specialist, writer, and the author of Great-Mutual-Funds.com. He has over 5 years of experience in the financial industry with a leading mutual fund company. “After 5 years of helping thousands of investors and learning a TON about mutual funds, I decided it was time to pass on my knowledge and experience to everyday investors. So I found an amazing web hosting company and started this website.”

Investing in Mutual Funds Can Be The Best Strategy For Financial Planning

A useful investment product that must be taken into consideration when managing your finances is mutual funds. Of course, before you even consider investing at all, the first thing you should do is get a clear picture as to your financial situation. Ask yourself, where do you wish to see yourself financially in a year? How about in five years? What about ten years, or twenty? What are your current financial means? Do you have any savings? Question how realistic your financial goals are when weighed against your current financial status, your savings, your income, existing investments if any, any inheritances you may be likely to receive and so on and so forth. Once you a clear picture of this in your head, you can approach a professional financial and / or investment management service that will, for a fee, guide you in the best direction as far as investing to secure your future is concerned.

Chances are, at least a small part of your resultant investment portfolio will consist of mutual fund investments. The next step will be to choose which mutual fund exactly to invest in. If the aim of your act of investing, overall, is to generate a recurrent income for yourself, then you should invest in a mutual fund that specialises in debt securities such as debentures, government and corporate bonds and suchlike. Such investments are known as fixed-income investments, and the funds invested in are known as debt funds. On the other hand, if the focus of your investment is to generate long term value, then you would probably be advised to invest in an equity fund, which specialises in equity securities such as shares and stock market investments.

Thus, when planning your finances, remember that a good, secure and well thought out investment plan is crucial to how successfully you ultimately organise your funds. In this regard, mutual fund investments can be highly beneficial as they are designed to cater to a wide variety of consumers, each belonging to a different financial class and having different financial aspirations in life. Mutual funds also come with professional management a service, which greatly improves the likeliness that your investment will be fruitful, and that you will procure the returns you desire.

It is safe to say that investing in mutual funds is a one of the best strategies of financial management, both in the long term and the short term, for investors who have large amounts of capital to invest as well as for the ones who do not.

Your Guide to Investing in Oil Companies

As a stock market investor you need to have a closer look at all the sectors that are there and among them one of the major sectors is the oil sector. Again the oil sector in isolation is not a good sector but combined with the alternative energy sector this sector has a lot of potential.

The oil companies are among the largest in terms of the market capitalization and in fact the top two are the blue chip companies. These companies also have the massive investment going on in the countries like Yemen, Syria and Russia where there is oil to be explored. The main challenge there is the country stability and the risk that it carries. These countries are not politically stable and the entire investment in that country can be a waste if the political scenario changes.

The other major risk that these oil companies now face is the ire of the public because of the depleting oil resources. More and more governments are now increasing their subsidies to the solar energy companies and also to a lot of alternative energy companies. So if you are thinking of investing in such companies then make sure that you have a tab on the oil prices. You should shift your investments to the alternative energy stocks if in case the oil prices become too high and the consumption of the gas goes low.

The fact is that most of the oil companies benefit from the high oil prices as they have fixed cost of production and any upswing in oil prices benefits them. It is the pure retail companies that will pose a challenge and that can be easily overcome if you a diversified set of companies namely the natural gas companies, pure oil exploration companies, pure retail companies and the alternative energy stocks.

Another way to invest in the energy companies is to invest in the companies that are there in the emerging economies like India and China. Both these countries have huge demand and that will mean that you will have the best of both worlds. In fact the initial public offering of the oil companies in these countries is a good way to gain entry into the market. You can also invest in the American Depository receipts of these companies. These ADR’s are listed in the New York Stock Exchange and you can easily buy them with your account that you have with the discount stock brokers.

Real Estate Investing – How to Build Wealth

You can tell real estate is hot, when you neighborhood grocer is thinking about switching his line of work and becoming a “flipper”. If you are new to real estate, “flipping”, a word that will become familiar to you, in no time, is the process of buying an investment property and selling it, soon thereafter. Usually, the property is put up for sale after sprucing it up with some paint and upgrading some fixures in the bathroom and kitchen.

The crazed real estate market over the past 5 years has nudged “wannabes” into the real estate arena. Our former federal reserve chairman described it best, when he coined the now famous term “irrational exuberance”. In other words, speculation with no backbone.

So can you really make money in real estate?

Yes. Without a doubt!

An experienced real estate investor does not fear dips in the market because their actions are not based on speculation. They invest by doing their homework and truly understanding, what they are getting in. If you are considering getting into the real estate market, follow these tips:

1. Read as much as you can about the real estate investment industry. When you think, you’ve read enough – read more. People who excel in any field, never stop learning.

2. Find a mentor, who can teach you the ropes. Maybe you can ride with them as they scout properties, draw contracts and settle on real estate deals. Gain knowledge about how they find the “gem” deals. The difference between a serious investor and an amateur is that a guru can find a deal that is a guaranteed winner,an amateur may find a deal that they think is a winner but the deal may turn sour. Do your howework.

3. Join your neighborhood Real Estate Investment (REI) club. You will meet many experts as well as newbies, that are in your shoes. This is your chance to build relationships. Every business centers around relationships – especially in real estate. Infact, this may be how you find mentor.

The first deal will be the most difficult. You will ease into the process after your initiation. You will also start building wealth through accrued equity in your properties. You can either “flip” your properties or you can hold on to them and become a landlord. Both have their advantages. One offers instant gratification and the other allows you steadily accumulate properties.

If you are a homeowner, you can finance your real estate investments with equity in your home, by getting a HELOC, home equity loan or doing a cash out refinance.

Tips for Investing

Many people want to take advantage of the opportunity to invest as a way to supplement their income, but few people have the knowledge or the time to monitor stocks and they are reluctant to pay the high fees associated with full-service brokers.

As well, most people know that a diversified portfolio is the best-performing portfolio, but few people have the huge capital it takes to properly diversify a portfolio made up only of stocks.

One option for those people is to purchase mutual funds.

A mutual fund is a pool of money from a number of investors and it is given to a mutual fund manager to go out and buy a good selection of diversified, well-performing investments.

There are many different types of mutual funds, so there is something out there for everyone. If you like bonds, for example, you can buy a mutual fund made up just of bonds and its return is probably better than most bonds available on the market today because they use a laddering concept to buy and sell bonds strategically. The income from this fund comes from the interest paid on the bonds. These are called fixed income mutual funds.

If you like stocks, there are many mutual funds available for you to consider, from riskier ones to safer ones to funds that trade primarily in overseas marketplaces. You will likely find a mutual fund that matches your risk tolerance, gives you a good return, and provides you with some diversification. The income from this fund comes from buying it the stocks low and selling them high. These are growth mutual funds.

Some of the consistently best-performing mutual funds are funds that are a combination of fixed income and growth. These are called growth and income mutual funds and they combine bonds, dividend paying stocks, and growth stocks altogether in a diversified fund. The income from this fund comes from a combination of bond interest, dividend payments, and growth-style selling. It is an excellent choice for putting in your portfolio. If you can only afford one mutual fund, this is probably the fund to purchase.

Whether you are trying to avoid the fees of a full-service broker, or are trying to invest wisely with a brief amount of time you have in the week, or are simply trying to diversify your portfolio, a mutual fund is an excellent choice. And a growth and income mutual fund, is usually the best choice.

What’s more, mutual funds are professionally managed, which means you don’t have to spend your day watching stock prices go up and down. The mutual fund manager does that for you. He or she watches the individual stock prices, makes adjustments, and sends you a report on a regular basis.

Investment Options and Investment Strategies

There are a large and varied range of investment products, a suitable investment portfolio can be created that will offer the possibility of good returns without excess risk. For the slightly more adventurous investor willing to take a risk for the chance of a higher return, the investment market has interesting possibilities as well. When looking to build your investment strategy, there will be some important points to take note before choosing the products that will be right for you.

Depending on the risk level, there will be different investment funds to recommend. There are a number of financial advisers who offer these services but only a few will continually assess the investment markets to ensure that clients money are invested to give them the highest potential for growth.

Generally we have two client types when it comes to investing, those who need and want to generate an income from their investments, and those who are only interested in growth of their investments.

Investing for Growth
After assessing your risk profile, finance experts will give you recommendations based on their continuous research. These recommendations will incorporate all your investment objectives, and will strive to find the correct balance of risk and reward for you. They will also evaluate your investments on an agreed date at least once a year to ensure that your funds are invested in the most opportunistic sectors

Investing for Income
They can also develop an investment portfolio that will minimize your risk, and ensure that you have a guaranteed income from your investments. There are many different investment products that suit income. Finance experts will make sure that you are able to do this in the most tax efficient manner.

Guaranteed Investments
Due to the volatility of investments in the last 5 years, more and more investors prefer to have a guarantee attached to their investments, especially those clients nearing or in retirement. Finance experts should continually analyze the different guaranteed products on the market place, and when questioned, they should offer the products to clients that they believe are the most beneficial to their needs.

In general, risk and reward should go hand in hand. However financial services should quantify the risk associated with all these investment funds. They can recommend investment portfolio and try to minimize the risks where it is possible. Finance experts cannot guarantee performance levels but they can monitor risks.

Saving in Investment Funds
While investment funds are primarily designed to serve those wishing to invest larger amounts as a lump sum, many also facilitate regular contributions through savings schemes. Your financial adviser can advise you on how to access products on a monthly savings basis.

All investments are different, and each comes with its own risks and attributes. Discovering your investment risk profile is the first step towards identifying which types of investments suit you best.

Rob Prime [http://www.principlefirst.co.uk/investments/] is an investment advisor and finance expert. He is a co-founder of ThinkPartners Ltd., a UK based company that offers various financial services. At PRINCIPLE FIRST [http://www.principlefirst.co.uk/], financial advisers have taken the concept of financial advice to a new level.

Behavioral Aspects of Investing

Going by Maslow’s Theory of Hierarchy of Needs, every human being starts with attempts to fulfill his or her biological and security needs, before embarking on attempts to satisfy other higher-level needs related to socialization, recognition and self-actualization. Investing one’s earnings, is, in a way related to the basic security need. Research has indicated that human psychology plays a predominant role in how an individual decides on where to invest.

Investment can be defined as “the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit”. In the context of Personal Finance, where we are talking about how an individual invests, the avenues for investment include, but are not limited to, Savings Bank deposits, Fixed Deposits with Banks and other Companies, Govt Bonds, Public Provident Funds, Pension Funds, Stocks (or Equity shares) of listed companies, Mutual Funds, Insurance, Gold, Real Estate and other instruments. If we look as the Returns, in general, Savings Bank Deposits yield the lowest returns, followed by Fixed Deposits, and instruments like Equity, Mutual Funds, and Real Estate could result in higher returns in the longer term. Now, how does an individual decide on how much to invest in Bank deposits, how much in Mutual Funds, and how much in Equities directly etc..?

While the answer to the above question will be determined by several factors such as the person’s age, the immediate, medium-term and long-term funding needs for day-to-day expenses, as well as planned events and unexpected emergencies, the behavioral factor, relating to the ‘risk-adverseness of the individual plays a critical role in deciding on the portfolio of investments.

A lot would depend upon how the individual would react to short-term dip in the value of his/her investment. Essentially, what this boils down to is the ‘perception of loss’ as seen by the individual concerned. While some can digest short to medium-term losses, some can never accept erosion of capital. And, again, even this tendency varies depending on the situation, and the immediate past anecdotes in the individual’s life.

Thus, while there are no such things like one-plan-fits-all in the realm of investing, the tricky thing is that even in the way the portfolio for an individual is structured based on his/her profile, the element of changes in behavioral responses needs to be assigned a high priority when designing the plan. While professionals can suggest a ‘good’ portfolio for an individual based on all the parameters discussed above, the individual needs to be educated and empowered to take the right decision depending on the swings in behavioral patterns at any given point in time.

The Structure of the Investment Process

The main financial market in the U.S. is the securities market. This is made up of stock, bond, and options markets. There are similar markets in most other major economies throughout the world. The common feature is that the price of an investment vehicle at any time is from an equilibrium between the forces of supply and demand. As new information about the returns and risk becomes available, changes in supply and demand could result in a new market price. The financial markets streamline the process of bringing the suppliers and demanders of funds together, and allow transactions to be made quickly and at a fair price. Suppliers of funds can transfer their resources to the demanders through financial institutions, financial markets, or in direct transactions. Financial institutions can participate in financial markets as either suppliers or demanders.

Suppliers & Demanders of Funds

Individuals, business, and government are key players in the investment process. Each one can be a supplier or demander of funds. In order for the economy to grow and prosper, funds need to be available to qualified individuals, business, and government. If individuals decided to hoard their extra funds instead of putting them in financial institutions or investing them in financial markets, then the individuals, business, and government in need of the funds would have a much harder time obtaining them. If this happened, consumer purchases, business expansion, and government spending would decline, and economic activity would slow.

Individuals- The individual’s role in the investment process is significant. They often demand funds in the form of loans to finance the acquisition of property-mostly automobiles, houses, and education. Even though their demand for funds is great, as a group, individuals are net suppliers of funds: meaning they put more funds into the financial system than they take out.

Business- Businesses usually require large sums of money to support operations. Business has both long and short term financial needs. They issue a variety of debt and equity securities to finance these needs. When they have excess cash they also supply funds. Overall, businesses in general are net demanders of funds.

Government– Federal, state, and local levels of government need vast sums of money to help finance long term projects to keep the government running and for the construction of public facilities. Sometimes, governments supply funds by making short term investments to earn a positive return on funds not being used at the time. Government is a net demander of funds. The government’s financial activities significantly affect the behavior of financial institutions and financial markets.

Types of Investors

Individual investors manage their own personal funds to achieve financial goals. They usually concentrate on earning a return on excess funds, building a source of retirement income, and providing security for their families. For individuals who lack time and/or expertise to make investment decisions for themselves often employ institutional investors-professionals who are paid to manage other people’s money. The professionals trade large amounts of securities for individuals, businesses, and governments. Institutional investors include banks, life insurance companies, mutual funds, and pension funds.

7 Key Financial Ratios Every Startup Should Know

Apart from having a great product, good sales, good SEO, great marketing, and so on… there is one thing that is vital to the long term growth and success of a startup: good accounting.

And yes… you may not be as versed in numbers as your accountant is. But do understand: its essential to have a working knowledge of an income statement, balance sheet, and cash flow statement.

And along with that a working knowledge of key financial ratios.

And if these ratios are understood will make you a better entrepreneur, steward, company to buy and yes…investor.

Because YOU’LL know what to look for in an upcoming company.

So here are the key financial ratios every startup should:

1. Working Capital Ratio

This ratio indicates whether a company has enough assets to cover its debts.

The ratio is Current assets/Current liabilities.

(Note: current assets refer to those assets that can be turned into cash within a year, while current liabilities refers to those debts that are due within a year)

Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets; A ratio between 1.2 and 2.0 is sufficient.

So Papa Pizza, LLC has current assets are $4,615 and current liabilities are $3,003. It’s current ratio would be 1.54:

($4,615/$3,003) = 1.54

2. Debt to Equity Ratio

This is a measure of a company’s total financial leverage. It’s calculated by Total Liabilities/Total Assets.

(It can be applied to personal financial statements as well as corporate ones)

David’s Glasses, LP has total liabilities of $100,00 and equity is $20,000 the debt to equity ratio would be 5:

($100,000/$20,000)= 5

It depends on the industry, but a ratio of 0 to 1.5 would be considered good while anything over that…not so good!

Right now David has $5 of debt for every $1 of equity…he needs to clean up his balance sheet fast!

3. Gross Profit Margin Ratio

This shows a firms financial health to show revenue after Cost of Good Sold (COGS) are deducted.

It’s calculated as:

Revenue–COGS/Revenue=Gross Profit Margin

Let’s use a bigger company as an example this time:

DEF, LLC earned $20 million in revenue while incurring $10 million in COGS related expenses, so the gross profit margin would be %50:

$20 million-$10 million/ $20 million=.5 or %50

This means for every $1 earned it has 50 cents in gross profit…not to shabby!

4. Net Profit Margin Ratio

This shows how much the company made in OVERALL profit for every $1 it generates in sales.

It’s calculated as:

Net Income/Revenue=Net Profit

So Mikey’s Bakery earned $97,500 in net profit on $500,000 revenue so the net profit margin is %19.5:

$97,500 net profit $500,000 revenue = 0.195 or %19.5 net profit margin

For the record: I did exclude Operating Margin as a key financial ratio. It is a great ratio as it is used to measure a company’s pricing strategy and operating efficiency. But just I excluded it doesn’t mean you can’t use it as a key financial ratio.

5. Accounts Receivable Turnover Ratio

An accounting measure used to quantify a firm’s effectiveness in extending credit as well as collecting debts; also, its used to measure how efficiently a firm uses its assets.

It’s calculated as:

Sales/Accounts Receivable=Receivable Turnover

So Dan’s Tires, earned about $321,000 in sales has $5,000 in accounts receivables, so the receivable turnover is 64.2:

$321,000/$5,000=64.2

So this means that for every dollar invested in receivables, $64.20 comes back to the company in sales.

Good job Dan!!

6. Return on Investment Ratio

A performance measure used to evaluate the efficiency of an investment to compare it against other investments.

It’s calculated as:

Gain From Investment-Cost of Investment/Cost of Investment=Return on Investment

So Hampton Media decides to shell out for a new marketing program. The new program cost $20,000 but is expected to bring in $70,000 in additional revenue:

$70,000-$20,000/$20,000=2.5 or 250%

So the company is looking for a 250% return on their investment. If they get anywhere near that…they’ll be happy campers:)

7. Return on Equity Ratio

This ratio measure’s how profitable a company is with the money shareholder’s have invested. Also known as “return on new worth” (RONW).

It’s calculated as:

Net Income/Shareholder’s Equity=Return on Equity

ABC Corp’s shareholders want to see HOW well management is using capital invested. So after looking through the books for the 2009 fiscal year they see that company made $36,547 in net income with the $200,000 they invested for a return of 18%:

$36,547/$200,000= 0.1827 or 18.27%

They like what they see.

Their money’s safe and is generating a pretty solid return.

But what are your thoughts?

Are they any other key financial ratios I missed?

Mike is an author, speaker, internet entrepreneur, and startup strategist.

He received his Bachelor of Science at NYIT, was an award winning salesperson at a couple of companies, and has had many business startups…and many business failures. On his website: [http://www.michaelgholmes.com] he teaches Biblical Strategies for Startup Entrepreneurs.