I am creating a table of financial ratios that can be a helpful tool for analyzing and identifying undervalued stocks. There are several key ratios that investors commonly use for this purpose. Here’s a table template you can use to organize and calculate these ratios:
I am adding optimal value limits or filtering criteria for each ratio can help you identify stocks that meet specific criteria for undervaluation or other financial metrics.
Keep in mind that these limits are general guidelines and may vary depending on industry, market conditions, and your specific investment goals.
| Ratio | Formula | Description | Optimum Value Limit |
|---|---|---|---|
| Price-to-Earnings (P/E) Ratio | Price per Share / Earnings per Share | Measures how much investors are willing to pay for each dollar of earnings. Lower is usually better. | Typically below industry average. |
| Price-to-Book (P/B) Ratio | Price per Share / Book Value per Share | Compares the stock’s market price to its book value. A ratio below 1 may indicate undervaluation. | Typically below 1.0. |
| Price-to-Sales (P/S) Ratio | Price per Share / Sales per Share | Evaluates how the market values each dollar of a company’s sales. Lower ratios can be favorable. | Depends on industry, but below industry average. |
| Price-to-Cash Flow (P/CF) Ratio | Price per Share / Cash Flow per Share | Measures the price relative to the company’s cash flow, a lower ratio may suggest undervaluation. | Typically below industry average. |
| Dividend Yield | Dividend per Share / Price per Share | Indicates the percentage return from dividends. A higher yield might suggest undervaluation. | Depends on your yield target, but higher is often better. |
| Earnings Growth Rate | (Current Earnings – Past Earnings) / Past Earnings | Examines the rate at which earnings are growing. Higher growth rates are often preferable. | Typically above industry average. |
| Debt-to-Equity Ratio | Total Debt / Total Equity | Evaluates the company’s financial leverage. A lower ratio may indicate a safer investment. | Depends on industry, but lower is generally better. |
| Current Ratio | Current Assets / Current Liabilities | Measures a company’s ability to cover its short-term obligations. Higher is generally better. | Typically above 1.0. |
| Quick Ratio (Acid-Test Ratio) | (Current Assets – Inventory) / Current Liabilities | A stricter measure of short-term liquidity that excludes inventory. Higher is better. | Typically above 1.0. |
| Return on Equity (ROE) | Net Income / Shareholders’ Equity | Reflects how efficiently a company generates profits from shareholders’ equity. Higher is better. | Typically above industry average. |
These optimal value limits can serve as a starting point for your stock screening process. However, it’s important to consider industry benchmarks and the company’s specific circumstances when determining whether a stock is undervalued or meets your investment criteria. Additionally, conducting thorough research and analysis is essential before making investment decisions.
