Important Investing Financial Ratios You Need to Know

The dividend yield ratio tells investors how much cash income they’re receiving on their stock investment in a business. This is calculated by dividing the annual cash dividend per share by the stock’s current market price. You can compare this with the interest rate on high-grade debt securities that pay interest, such as Treasure bonds and Treasury notes, which are the safest.

Book value per share is calculated by dividing total owners’ equity by the number of outstanding stock shares. While EPS is more important to determine the market value, book value per share measures the recorded value of the company’s assets less its liabilities, the net assets backing up the business’s stock shares. It’s possible that the market value of a stock could be less than the book value per share.

The return on equity (ROE) ratio tells how much profit a business earns compared to its stockholders’ equity book value. This ratio is beneficial for privately owned businesses, which cannot determine the current value of owners’ equity. ROE is also calculated for public corporations, but it plays a secondary role in other ratios. ROE is calculated by dividing net income by owners’ equity.

The current ratio measures a business’s short-term solvency, in other words, its ability to pay its liabilities that come due soon. This ratio is a rough indicator of whether cash on hand plus the cash to be collected from accounts receivable and from selling inventory will be enough to pay off the liabilities that will come due in the next period. It is calculated by dividing the current assets by the current liabilities. Businesses are expected to maintain a minimum 2:1 current ratio, which means their current assets should be twice their current liabilities.