Some important financial ratios

Finally, after much blabbering about financial issues, I have come to the point to introduce some key financial ratios to my avid readers. Amongst the most common are:-

The P/E Ratio = Price/Earnings per share

This ratio I have mentioned before and its importance is undoubted. It is by far most common amongst the financial savvy crowd and can be used comparably against the rate at which a company grows.

The D/E Ratio = Debt to Equity Ratio

This is a measure of how much debt and equity the company employs. A high ratio might signify too much debt whereas a low ratio might mean this company is a good investment. Personally, I look for low D/E ratios as I am debt averse.

Current Ratio = Current assets/Current liabilities

This ratio measures the amount of current assets the company has to pay off its current liabilities. A ratio of 2 tells me that for every dollar of current liabilities the company has, it has 2 dollars of current assets that it can readily use to pay off its current liabilities. Current means within the coming 12 months.

Dividend yield = Dividends/Share price

This measures the amount the company pays out as dividends, based on its share price. An elderly couple might want to look at a company with a high dividend yield, showing that the company pays out large proportions of its earnings as dividends. A yield of 5% is already a high yield.

Return on Equity = Net profit after tax/Equity

This simple measure calculates the return on shares based on net profit after tax. However, not all net profit is paid out as cash and some of them might be retained in the company for investment/growth purposes. Hence, this equation is useful only in measuring the amount earned based on the amount of equity capital employed by the company.


By learning these 5 simple ratios, you have already mastered the beginning of financial analysis. Go through it a few times and you will realise it is actually quite easy to become a financial analyst.