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What is ratio analysis for stock market?
Investors need to understand the stock market because they have to invest in the stocks of various companies. The stocks of the companies are never steady and the price of the stock goes up and down all the time. There is a need to evaluate the company and its performance through ratio analysis for stock market. So because there is no stability of the price in the stock market, as an investor you need to know ratio analysis for the stock market.
The Ratio Analysis is the evaluation of the overall performance of the company. The share market ratio analysis evaluates various factors like the liquidity, solvency, operational efficiency, and profitability of the company. To get all the information, a share market ratio analysis is the best way to find out the details about any company.
The share market ratio analysis is done analyzing the past performance of the company and does a comparison of the company's growth rate and red flag. The ratio analysis helps the investors to identify the investment opportunities and assess the performance of the company and its different aspects.
So, ratio analysis is for below points,
Comparison of the performance
Trend Analysis
Operations Efficiency
Profitability
Liquidity
Solvency
What is ratio analysis and its types?
There are different ratios in stock market. Now, let us see what is ratio analysis and its types.
Ratio analysis analyzes the trend of the companies and the financial health of the companies. For this, it has to depend on the financial statement of the company. With the help of this ratio, the investors can know if the company has a numerical relationship with its position or now.
Any ratio provides a statistical measure for analyzing and understanding the relationship of or between two variables and provides accurate figures. These figures help the investors, creditors, companies, and finance executives.
These financial ratios are largely grouped as Liquidity Ratios, Efficiency Ratios, Market Value Ratios, Profitability Ratios, and Leverage Ratios. So let us see some of the stock market financial ratios.
Financial ratios in stock market
For any analysis, financial ratios in stock market are the fundamental and required components. When it comes to investing, there are stakes involved. Investors need to constantly monitor the stock market to understand what action is required to take. There are different ratios in stock market. But as per the requirement, you are only supposed to use a few important financial ratios in stock market.
List of important financial ratios in stock market
1. Quick Ratio:
Quick Ratio gives you an idea about the liquidity of the business. In this ratio, you have to subtract the current inventory from the current assets. And then you can divide it by liabilities. If the ratio is greater than one, then it is a good sign that the business has a good financial position.
Here is the formula,
Quick Ratio = (Current Assets-Inventory)/Liabilities
2. Debt to Equity Ratio:
Debt to Equity Ratio is very important to know if the business is borrowing more than its paying capacity or not. This ratio is calculated by dividing the total liability by the shareholders' equity. The ratio should be below so it can be said that the company holds less debt.
Here is the formula,
Debt to Equity Ratio = Total Liabilities / Shareholders’ Equity
3. Working Capital Ratio:
This ratio is very important to find out about the company and if it will be able to pay its current debts. If this ratio is high then it is a good sign. To get what is the Working Capital Ratio, one must divide the total assets by total liabilities
Here is the formula,
Working Capital Ratio = Total Assets/Total Liabilities
4. PE (Price to Earnings) Ratio:
PE Ratio shows the earning potential through its calculation. This ratio is calculated by dividing Share price by earning per share. With the help of this ratio, one can know if the stock is overvalued or undervalued. It also shows the amount to be paid for each earned rupee.
Here is the formula,
Price to Earning Ratio = Share’s Price/Earning per share
5. ROE Ratio (Return on Equity):
This ratio is a useful ratio for calculating the profit. This ratio is calculated by subtracting the earning from dividends and dividing it by shareholder Equity. With this ratio, you can know about the profitability of the company and the return of the net worth.
Here is the formula,
Return on Equity Ratio = (Earning-Dividends)/Shareholder’s Equity
6. Earning Per Share (EPS) Ratio:
EPS ratio helps the investors assess the future earnings. It measures the net future income you will receive on each share of the stock. EPS is calculated by dividing Net Income by Outstanding Shares, If the company traded for loss over the years, the result of the ratio could be negative.
Here is the formula,
Earning Per Share Ratio = Net Income/Outstanding Shares
7. Profit Margin Ratio:
The Profit Margin ratio is one of the most important ratios that show how the company manages its costs. It also measures how well the company converts revenues into profit. The formula for this is simple as you have to divide profit by revenue.
Here is the formula,
Profit Margin Ratio = Profit divided by Revenue
These are some of the important ratios useful in determining the expected outcome. But there are many other different ratios in the stock market that you can use for analyzing various outcomes. Now let us talk about the golden ratio in stock market analysis.
Golden ratio in stock market analysis
So, by now you should have an idea about what ratio analysis is and its types. Now let us understand the golden ratio in stock market analysis.
The golden ratio in stock market analysis is associated with the Fibonacci sequence. This sequence is named after Leonardo Fibonacci. Leonardo Fibonacci was the founder of Italy.
The Golden ratio helps in describing the predictable patterns. These patterns describe everything starting from the smallest thing like an atom to the giant space anomalies and enormous celestial bodies. But the golden ratio in stock market analysis means the Fibonacci sequence. The Fibonacci sequence is simply the addition of the two numbers preceding the current number. For example, 3, 5, 8, 13, 21, etc.
The quotient of the adjacent number has a proportion of about 1.618 and if this is inverted it becomes 0.618. In this sequence, this is the proportion that is called the Golden ratio. About everything has its dimensional properties that follow the golden ratio of 1.618. So, for building blocks, this is the fundamental function.
If you start measuring this ratio in the things around you, you will get the number 1.618. So this was the golden ratio in general. Now, how does that apply to finance?
The golden ratio is translated, in technical analysis, into three different percentages. 38.2%, 50%, and lastly 61.8%, But this is not limited as one can use more multiples if he needs like 23.6%, 161.8%, and 423%. It can go on and on.
The Fibonacci sequence is used in the chart helps determine four different aspects that are
Retracement
Arcs
Fans
Time Zones
The golden ratio and Fibonacci sequence and the numbers are very helpful in the estimation of areas. In the financial market, the golden ratio is used to obtain an accurate forecast. This sequence can be used to find out arc and resistance If this Fibonacci sequence is combined with Elliott Waves, then the forecast can be known of the extent of the retracement after there are different waves.
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