One cannot invest on the basis of mere gut feeling or instincts. There must be some underlying logic, reasoning, or calculation to determine the nature of an investment. An average investment is classified as inexpensive or expensive. However, to seasoned investors, numbers and costs matter. They make investment decisions on the basis of stock valuations and ratios derived from investments.

Investing based on simple ratios
Without suitable ratios, it is impossible to invest in a stock.

Earnings per share (EPS)
This ratio helps judge the profitability of a company. It indicates the portion of a company’s profit allocated to each common stock. Earnings per share is calculated as follows:

EPS = (net income – dividend on preferred stocks)/average outstanding stocks.

Price-to-earnings ratio (P/E)
This is the ratio of a company’s stock price relative to its EPS. This is one of the most important valuations or ratios, and it is used widely among professionals. The P/E ratio is calculated as follows

P/E = current value per share/earnings per share.

Price-to-sales ratio (P/S)
This ratio is quite similar to the P/E ratio, except that instead of earnings, it measures the price of a company’s stock against the company’s annual sales revenue. It is calculated as follows,

P/S = market cap of a company’s stock/company’s sales over the past 12 months.

Debt-to-equity ratio (D/E)
This ratio indicates the amount of equity and debt used to finance a company’s assets. The D/E ratio should neither be too high or low. In addition, this ratio is a measure of the commitment of debtors and creditors as opposed to shareholders’ commitment.

Dividend yield
This ratio is useful for determining the amount of dividend paid by a company relative to its share price. The dividend yield ratio is measured in percentage. This ratio is calculated as follows,

Dividend yield = dividend per share/price per share.

Price-to-book ratio (P/B)
This ratio compares a company’s stock market value to its book value. The P/B ratio is calculated as current stock closing price/book value per share in the latest quarter.

Payout ratio
The portion of earnings given as dividend to shareholders is the payout ratio of a company. This ratio signifies the percentage of earnings per common share allocated to pay dividends.

Current ratio
This ratio best describes a company’s ability to honor short-term liabilities such as debts, taxes, or accrued expenses by using its short-term assets such as inventory, cash, or liquid assets. One can gauge a company’s financial health based on this ratio.

All above-mentioned ratios help investors gain thorough knowledge about any company in which they wish to invest their hard-earned dollars. One can find these figures on a company’s balance sheet.