While investing in stocks, you should examine 5 basic financial ratios. After having more investing information, you can look at other detailed ratios.
- Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn’t exceed 40.
- Price-to-sales ratio (PSR): The PSR should be as close to 1 as possible.
- Return on equity (ROE): ROE should be going up by at least 10 percent per year.
- Earnings growth: Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.
- Debt-to-asset ratio: Debt should be half of assets or less.