subject: Some Fundamental Ratios That Can Give You A Good Idea On Just How Strong A Company Is [print this page] Before you invest into a stock for the long term you are going to have to ask yourself if it is even worth buying and holding onto that stock. It is very easy to tell yourself that you are just going to buy strong stocks and hold onto them, but how can you tell if a stock is strong or not?
One method would be to simply look at the company itself and try to determine if that company has a lot of demand behind it.
Another way is to use financial ratios to tell just how stable the financials behind a company are and how cheap the stock is. Here are some financial ratios you can take into consideration next time you are doing your own research.
1.PE Ratio Formula
The PE ratio takes the price of the stock and dividends it by the earnings that the company makes. The ratio can then be compared with other companies to help you decide if the stock is underpriced or overpriced. The lower the PE ratio the better.
Let's look at an example, if you find a stock with a PE ratio of 9 and the average PE ratio for the industry group is around 11 then you know the company is undervalued a little bit and will likely go up to meet its competition.
The quick ratio is a ratio that tells you how well prepared the company is to meet its long term financial obligations. Any company with a quick ratio below 1 is considered to be higher risk because their assets do not cover their liabilities if they ever needed to.
The solvency ratio is very similar to the Quick ratio in that it looks at how much debt a company has compared to how many assets the company has. This ratio can then be compared with other ratios of other stocks in the same industry group to see if the company is taking on too much debt compared to its competitors.
