In this post I will include descriptions of investing ratios and what I look for when Ichoose a stock to invest in.

Quality

Growth

EPS%

This is the averagegrowth of their Earnings Per Share. I use the averagesfor the last 3,5, and 10 years.To calculate the

Earnings per Share

, or

EPS

, you divide the company’s net incomeby the number of shares outstanding during the same period.

REVENUE%

This is the same thing as ESP% except that we are using the growthof the Revenue instead of Earnings. Revenue is the total amount of moneybrought for the company.I also use the averages for the last 3,5, and 10 years.

Profitability

Profit Margin,

also called net margin, or net profit margin, is calculated asnet profits divided by therevenue, or sales. This measures how much of theirrevenue they get to keep.A high profit margin means that the company isefficient and is able to control their costs. I look for profit margins that are higherthan their competitors in the same industry. I also look to see if the company isincreasing their profit margin throughout the years. If they are it means that thecompany is improving andlowering the cost of their operations which couldmeanthat they are building a competitive advantage that their competitors could notmatch.

This is a post written by Mark Gran and can be found athttp://granvestor.wordpress.com/2010/08/23/investment-research/ GranVestor Value Investing Blog

Operating Margin,

, is the proportion of revenues remaining after paying thecosts of operating the business, such as labor costs (wages), raw materials, overhead,depreciation and amortization, selling, general, and administrative expenses,advertising, etc. It is similar to the profit margin except it does not include all costs, soit will be higher than the profit margin. Operating margin can be calculated bydividing Operating Profit by Net Sales.

Return on Assets,

RoA

measures how profitable a company is relative tothe totalassets of the company. RoAtells how efficient management is at using its assets togenerate earnings. If it is high it is high then the management is doing a good job atallocating its resources. Theassets of a company include both debt and equity,so if acompany has no debt theirReturn on Assets and Return on Equity would be the same.

Return on Equity,

RoE,

is similar to RoA except for instead of comparing assets weare comparing the earningsto the Shareholder Equity, which is the Total Assets minusthe Total Liabilities. Shareholder Equity is also called the Book Value. RoE shows howefficient management is at turning the shareholder equity into earnings. Returnonequity is calculated by taking a year’s worth of earnings and dividing them by theaverage shareholder equityfor that year. I look for companies that have a RoEof atleast 10% and that of higher than the competition.

Management

Insider Ownership

is how much of the stock is owned by the management of thecompany. I look for stocks with a high percent of insider ownership, under the theorythat when management are shareholders, they will act in its own self interest, andcreate shareholder value in the long-term.

Financial Health

Current Ratio

measures how liquid the company is and shows if they have theresources to pay of their liabilities over the next 12 months.

CurrentRatio = Current Assets/Current LiabilitiesCurrentAssets are a category of Assets on the balance sheet that include cash andassets that are expected to be turned into cash within 1 year.CurrentLiabilities are a category of liabilities on the balance sheet that include financialobligations that need to be payed for within 1 year.I look forcompanies that have a current ratio of at least 1, preferably 2.

Debt/Equity

, or

D/E, Debt-to-Equity,

shows how much debt the company hascompared to its equity. A high debt/equity ratio generally means that a company hasbeen aggressive in financing its growth with debt. If a lot of debt is used to financeincreased operations (high debt to equity), the company could potentially generatemore earnings than it would have without this outside financing. However, the cost of this debt financing may outweigh the return that the company generates on the debtthrough investment and business activities and become too much for the company tohandle. This can lead to bankruptcy, which would leave shareholders with nothing. Ilook for companies that don’thave too much debt that is less than 1. If theydo have alot of debt I look to see how efficient the company is at turning that debt intoearningswith ratios such as the Returnon Assets.

Valuation

Price/Earnings,

P/E

, is the price of the stock divided by its EPS of the last twelvemonths. This is probably the most popular metric to valuing a stock. In general, a highP/E suggests that investors are expecting higher earnings growth in the futurecompared to companies with a lower P/E. However, the P/E ratio doesn’t tell us thewhole story by itself. It’s usually more useful to compare the P/E ratios of one companyto other companies in the same industry, to the market in general or against thecompany’s own historical P/E. I look for companies of with a P/E of less than 15 andbelow the industry averages.