OpenMarkets Education

Key sharemarket ratios

When reading about stocks, you’ll encounter a whole new language. You may see financial ratios quoted in the media or broker research; these are some of the factors used to determine whether a company is a buy, sell or hold.

Some of the primary sharemarket ratios are:

RatioDescription
Book valueA company’s value as declared in its annual accounts.
Current ratioMeasures a company’s liquidity position and illustrates how equipped the company is to meet short-term obligations with short-term assets.
Days receivable ratioMeasures how quickly a company receives payment of invoices.
Debt to equity ratioMeasures the extent to which a company is financed by debt versus equity. Generally, if the company's returns are higher than its interest cost, debt can enhance value.
Debt to cashflow ratioMeasures how many years it would take to pay off debt given current cashflow.
Dividend cover ratioMeasures the number of times a dividend is covered by earnings.
Dividend earnings ratioMeasures how much profit is spent on dividends; it identifies the percentage of earnings per share allocated to paying cash dividends to shareholders.
Earnings per shareMeasure of the amount of net profit earned for every ordinary share on issue, expressed as cents per share.
Gearing ratioThe ratio between external borrowing and the equity value of a company; generally, the more highly geared a company, the more risk it carries.
Interest cover ratioMeasures how many times a company’s interest liabilities from borrowed money are covered by its earnings.
Net profit margin ratioMeasures the profit on each dollar of sales after tax and all costs – the gross profit margin ratio measures profit before tax and costs.
NTA per share ratioMeasures what a share in a company would be worth in the event of liquidation once debts are paid and if proceeds were distributed to shareholders in proportion to their holding.
Price/book ratioThe current market price of a share divided by its book value per share. A lower ratio could mean that the stock is undervalued.
Price/earnings ratioThe current market price of a share divided by its earnings per share; it is used as a measure of attractiveness of one share versus another as it shows how much investors are paying for each dollar of earnings. A high P/E ratio suggests the stock is overvalued.
Return on assets (ROA)Measures the profitability of a company as a percentage of total assets. It’s calculated by dividing net income by total assets.
Return on equity (ROE)Measures the return shareholders get from the business and overall earnings and is calculated by dividing net income by shareholder equity.

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