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Knowing the Best Financial Measures before Investing

Part of the Investing in Shares For Dummies Cheat Sheet

When investing in shares, you need to know how a company is doing. Certain financial measures can help you more than others when analysing a company’s performance. Here are five of the best:

  • Price-to-Earnings ratio – PE: For large-cap shares, the ratio should be under 20. For all shares – 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 per cent per year.

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

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

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