Online Test Banks
Score higher
See Online Test Banks
eLearning
Learning anything is easy
Browse Online Courses
Mobile Apps
Learning on the go
Explore Mobile Apps
Dummies Store
Shop for books and more
Start Shopping

Financial Measures to Consider before Investing in a Stock

Part of the Stock Investing For Dummies Cheat Sheet

You're thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider:

  • Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn't exceed 40.

  • Price-to-sales ratio (PSR): The PSR should be as close to 1 as possible.

  • Return on equity (ROE): ROE should be going up by at least 10 percent per year.

  • Earnings growth: Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.

  • Debt-to-asset ratio: Debt should be half of assets or less.

blog comments powered by Disqus
Advertisement

Inside Dummies.com

Dummies.com Sweepstakes

Win $500. Easy.