My First Stock

My First Stock

17-09-2022

10:00

10 Financial Terms of Investing explained 🧵🧵 1) EBITDA 2) PAT 3) ROE 4) ROCE 5) D/E Ratio 6) Acid Test Ratio 7) Working Capital Turnover 8) PE 9) PS Ratio 10) Interest Coverage Please Re-Tweet like for Max Reach🙏

1) Earnings before Interest Tax Depreciation & Amortization (EBITDA) margin - It shows how efficiently an organization is operating. Ratio = EBDITA / Net Sales EBITDA = Operating Income (EBIT) + Depreciation + Amortization EBDITA Margin of 10% and more is considered good.

2) PAT Margin - Its similar to EBDITA Margin, the only difference is - it is calculated after taxes. PAT Margin = [PAT/Total Revenues] A good margin will vary considerably by industry, but as a general rule of thumb, 5% is low, 10% is avg and 20% can be considered high

3) Return on equity It indicates how much return the shareholders are making over their initial investment in the company ROE - [Net Profit / Shareholders Equity* 100] Generally 15%+ ROE can be considered to invest in a company with a good cashflow and low debt.

4) ROCE - Return on Capital Employed Return on Capital employed indicates the overall return the company generates considering both the equity and debt ROCE = [Profit before Interest & Taxes / Overall Capital Employed] ROCE of 15% and above is considered good

5) Debt to Equity Ratio - It can be measured directly from Balance sheet - [Total Debt/Total Equity] D/E Ratio < 1 = Safe 1 < D/E < 2 = Moderate D/E > 2 Aggressive and risky Lower is better, means funds can be arranged easily But then again depends on Sector to Sector

6) Interest coverage Ratio - The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. IC Ratio - [Earnings before Interest and Tax / Interest Payment] Higher is better

7) Acid Test Ratio - The acid-test ratio is a measure of how well a company can satisfy its short-term (current) financial obligations. Ratio - {Currents Assets - Inventories}/Current Liabilities Ideally, a business should have an acid-test ratio of at least 1:1

8) Working Capital Turnover - Working capital turnover ratio indicates how much revenue the company generates for every unit of working capital. Working Capital Turnover = [Revenue / Average Working Capital] Higher the working capital turnover ratio the better it is

9) P/S - Price/Sales Ratio This ratio compares the stock price of the company with the company’s sales per share Price to sales ratio = Current Share Price / Sales per Share One can easily find overvalued and undervalued stocks using this ratio and by comparison with peers

10) Price to Earning (P/E) Ratio P/E = Stock Price/ Earning per Share P/E indicates how expensive or cheap the stock is trading at - lower is better Compare PE of similarly placed companies to find undervalued gems.

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