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| Financial ratio can tell a lot about a company. You can see how much they make profit, or how healthy they are. Financial ratio can help making decision in picking a stock. To know whether a company is healthy or not, you can check their current ratio (current assets / current liabilities), debt ratio (total debt/total assets), and debt to equity ratio (total debt / total equity). To know the performance of making profit, check the Return on Asset (ROA = Net Income / total assets) and Return on Equity (ROE = Net Income / total equity). Another important ratio is Earning per Share (Net Income / total outstanding shares), Price/Earning ratio (P/E = market price per share / earning per share), and price/book value ratio (market price per share / book value per share). The higher the current ratio, ROE, ROA is better. The lower the debt ratio and debt to equity ratio is better. Low P/E and price/book value ratio means the stock is cheap. Cheap stock means that it has poor performance or people didn’t realized that the company is good.
To make decision on which stock you should buy, compare financial ratios between each company in the same sector / business.
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