How often do we read daily in the conventional investment media, specific stock recommendations, detailed company studies and more about the various stock ratios that can be of importance for a fundamental analysis. And usually the interpretation of the specific ratios ends with a larger or smaller question mark. Or, despite existing know-how, there is not enough time for the possibly time-consuming valuation analysis.
Although individual stock ratios seem to have lost importance - the stock market often develops a momentum of its own that is not always comprehensible - these indicators should not be underestimated and should be included in an investment decision whenever possible, especially if you tend to invest for the longer term. Stock ratios can also be helpful for traders, but they are more likely to be guided by market momentum.
However. So that you can gain an overview or briefly look up, you will find detailed explanations of the individual and supposedly most important indicators below:
Meaning: The P/E ratio is probably the best-known and perhaps even the oldest ratio for valuing a share. It defines whether a share is currently bought cheaply or rather expensively. The ratio is calculated using the share price in relation to the company profit achieved, broken down to a single share of the same company.
Ultimately, opinions differ as to where the "favourable" valuation ends and the more "expensive" one begins. For a long time, the "rule of thumb" was that a P/E ratio in the 15 range is good, anything below that counts as a "cheap" valuation, and anything above that tends to indicate an overvaluation. However, since the valuation is based on the balance sheet date, future expectations are of primary importance: If one assumes a negative future development of the company, the low P/E ratio may be justified. If, on the other hand, future expectations are very high or good growth is realistic, an anticipated high P/E ratio is not necessarily an argument for an overpriced share purchase. If a P/E ratio is above the value of approx. 25, the future prospects should already be quite clear. Caution is advised when a P/E ratio is exorbitantly high!
Calculation: Share price divided by earnings per share.
Example: If a share costs CHF 300 and the earnings per share are CHF 18, the P/E ratio is 16.6.
Meaning: The P/B ratio also goes back a long way in the history of fundamental analysis. However, this ratio is less about the earnings view and more about the question of the substance of the company in question. So the question here is, "Does the company have assets, or how much equity does it have?" With the KBV, one then calculates how much of these assets are attributable to each Swiss franc that one invests in the company or the stock.
Calculation: Share price divided by book value per share.
Example: If the stock of Muster AG has a book value of CHF 100 and the stock price of Muster AG is CHF 100 at the same time, the KBV calculates exactly the value of 1. This in turn means that the book value also corresponds exactly to the market value.
If the book value now remains stable at CHF 100, but the share price rises to CHF 150, the P/B ratio also increases to 1.5, which would mean that the share has become more expensive (vice versa) or is perhaps already too expensive.
Meaning: The KUV is applied according to the same procedure as the P/E ratio. Difference: Here the turnover is put in relation to the share price, and not the profit. With the KUV, one sees how much turnover the company makes per CHF that one would invest in a share. However, it is important to note that this ratio makes more sense when comparing companies within the respective industry.
Calculation: Share price divided by sales per share.
Example: See point 1.1.3 (turnover instead of profit).
Meaning: Again, there is not much difference to the P/E ratio (1.1). With the KCV, it is simply the cash flows and not the profits that are applied.
Calculation: Share price divided by cash flow per share.
Example: If a company buys a machine for CHF 100,000 as an investment, the cash flow decreases by this entire amount because this money flows out of the company; the profit does not change (for the time being).
Since with cash flow - in contrast to profit posting - no "window dressing" is possible (or at most only to a very limited extent), the informative value of the KCV is quite good. In the case of high investments or divestments, however, this key figure can be subject to quite high fluctuations.
Significance: The dividend yield is particularly important for investors with a longer-term horizon, because they tend to focus more on the payout and less on the price gain (e.g. pension funds). The dividend yield shows how high the dividend payment is per CHF invested in the corresponding share.
Calculation: Dividend per share divided by the share price.
Example: If the share price is CHF 60 and the company pays a dividend of CHF 1.80, this corresponds to a yield of +3%.
Meaning: The key figures used under the term "profit" are probably the most uncertain. However, it is precisely here that very important key figures can be found.
The key figure EBITDA shows whether a company generates profit from product sales/core business alone. EBITDA is only of secondary importance for the actual profit.
EBITDA = "Earnings Before Interest, Taxes, Depreciation and Amortization".
Calculation: Sales minus production costs = EBITDA (earnings before interest, taxes, depreciation and amortization).
Meaning: EBIT corrects EBITDA for depreciation and amortization, which is not a real expense but is nevertheless relevant to profit. EBIT is therefore often referred to as the "operating result".
EBIT = "Earnings Before Interest and Taxes."
Calculation: EBITDA less depreciation and amortization = EBIT (earnings before interest and taxes).
Meaning: The key figure "net profit for the year" ultimately corrects EBIT by interest and taxes.
Calculation: EBIT less interest and taxes = net profit for the year.
Meaning: This ratio tends to be very hypothetical, because it always lies in the consideration of the achieved, past profits (ACTUAL) as well as the future, estimated profits (TARGET). As far as the future and corresponding forecasts are concerned (e.g. from analysts, the company itself or other sources), a certain degree of caution is always advisable.
Nevertheless, past earnings growth as well as the derived forecasts provide a useful picture for selected investment decisions!
Meaning: As a shareholder, you are an equity investor in a company. This means that you automatically participate in both the profits and the corresponding losses in value. The return on equity is therefore also an important indicator when making an investment decision.
Calculation: profit divided by equity. The higher the return on equity, the higher the profitability of the company... or in other words, the better the company works with the capital invested by the equity investors.
Meaning: The share price is in itself only the price for which a share is traded daily (at stock exchange times). And within the framework of the tool of a "chart" (price graph/price development over x arbitrary period of time) one can read out the different development phases of the share price (not of the company).
Since stock corporations issue different quantities of shares, the different price sizes also arise. A visually more expensive share is therefore not necessarily worth more than a share that costs less. Therefore, the following ratio is also more significant:
Meaning: The effective, total market value of a company is shown by the key figure "market capitalization". This therefore fluctuates in parallel with the share price development, according to the following calculation.
Calculation: Share price times number of shares issued.
Meaning: This term is quickly explained. The free float indicates how many of the shares issued are available for actual stock exchange trading. The higher the free float, the more liquid and thus more tradable the respective share is.
The free float does not include the holdings of company owners (founders, family members, etc.) or other major shareholders.
Significance: Return on equity and also the principle of equity have already been explained in 2.4. From the point of view of the fundamental financial stability of a company, the equity ratio is also of central importance.
Simply put, the higher the equity ratio, the lower a company's susceptibility to crisis. Creditworthiness is also higher in this case.
Comparisons across different industries are then usually not optimal, however, as there are more capital-intensive and less capital-intensive industries.
However, the ratio is probably most important for the comparison with debt. A high equity ratio indicates low debt and vice versa.
But even a high equity ratio need not always be optimal, because it may well be more lucrative for a company to take out low-interest loans to finance a planned investment. This is because raising new equity capital, as an alternative to borrowing, would also dilute earnings per shareholder accordingly.
As a rule, a balanced equity ratio is probably best. However, it should never be too low.
Calculation: Equity divided by total assets.
Meaning: As already shown under 4.1, the interaction between equity and debt capital takes place here. The same applies as above: The higher the debt, the riskier the investment.
Calculation: Debt divided by equity.
Example: A company has total assets of CHF 500 million. This sum is divided into CHF 350 million in equity and CHF 150 million in debt. The above calculation results in a debt-equity ratio of around 43%.