The Best Financial Measures for Stock Investing
Financial ratios help investors find stocks that offer good value by giving numbers meaning an putting them into perspective. If you’re considering investing in a company’s stock, ensure that the company passes these ratio tests.
Price-to-earnings (P/E) ratio: 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 (P/S) ratio: This ratio should be as close to 1 as possible (or below 1).
Return on equity (ROE): The ROE should be going up by at least 10 percent.
Earnings growth: Earnings should be at least 10 percent higher than in the year before. This rate should be maintained over several years.
Debt-to-asset ratio: Debt should be 30 percent or less compared to assets.