1. How are ROE and ROCE helpful in identifying quality companies?

The two ratios are measures of efficiency and profitability. ROE (Return on Equity) determines the amount of profit that a company has earned on the shareholder funds. ROCE (Return on Capital Employed) is a combination of debt and equity and gives a more detailed view of how efficiently the total capital is being used.

2. What is an important ratio for value investors, the P/E or P/B Ratio?

Both P/E (Price-to-Earnings) and P/B (Price-to-Book) ratios are valuable, yet the relevance of the ratios varies by industry and company type. It is suitable when the P/E Ratio is used to analyse profit-driven firms with stable earnings (FMCG or IT). Asset-intensive businesses such as banks, insurers, or real estate businesses can be better analysed using the P/B Ratio. The two usually give a better valuation picture when combined.

3. What is the difference between the P/E ratio and the EV/EBITDA ratio?

The P/E ratio is sensitive to the equity value against the earnings per share and therefore is handy in comparing companies of the same capital structure. Instead, the EV/EBITDA ratio considers enterprise value (equity + debt) and operating profit, providing an analogy between firms of varying levels of debt. Consequently, EV/EBITDA is frequently applied in cross-corporate or cross-industry analysis.

4. What is the purpose of financial ratios in value investing?

Financial ratios are applied to get an idea of whether the stock of a company is fairly priced when measured against the earnings of the company, its assets, and its cash flows. They transform complex financial data into comparable measures.

5. Are ratios enough to be used by investors to make buy or sell decisions?

No. Ratios are not complete answers. They assist in determining potential opportunities or red flags. Investors use a combination of ratio analysis and qualitative checks to make balanced investment choices.

Top Ratios used in Value Investing

Home

Investing

Top Ratios used in Value Investing

Investing

Top Ratios used in Value Investing

Ratios in value trading help you determine the current value of the entity you are trading in, this can help trader by giving an idea about the best time to invest in the market.