One way to look at this is the debt-to-capital ratio, which adds short- and long-term debt, and divides it by the company's total capital. The higher the ratio is, the more a company is indebted. In general, debt-to-capital ratios above 40 percent warrant a closer look to make sure the company can handle the debt load.
There are six basic financial ratios that are often used to pick stocks for investment portfolios: the working capital ratio, the quick ratio, earnings per share (EPS), price-to-earnings (P/E), debt-to-equity (D/E), and return on equity (ROE).
What is a good PE and PB ratio? A “good” PE ratio varies by industry and market conditions, typically higher for growth companies. A PB ratio under 1 might indicate undervaluation. Both should be evaluated against industry averages and historical company performance for context.
Buffett uses the average rate of return on equity and average retention ratio (1 - average payout ratio) to calculate the sustainable growth rate [ ROE * ( 1 - payout ratio)]. The sustainable growth rate is used to calculate the book value per share in year 10 [BVPS ((1 + sustainable growth rate )^10)].
The 90/10 rule in investing is a comment made by Warren Buffett regarding asset allocation. The rule stipulates investing 90% of one's investment capital toward low-cost stock-based index funds and the remainder 10% to short-term government bonds.
Return on equity ratio
This is one of the most important financial ratios for calculating profit, looking at a company's net earnings minus dividends and dividing this figure by shareholders equity. The result tells you about a company's overall profitability, and can also be referred to as return on net worth.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.
Conventionally, a PB ratio of below 1.0, is considered indicative of an undervalued stock. Some value investors and financial analysts also consider any value under 3.0 as a good PB ratio. However, the standard for “good PB value” varies across industries.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
Learn how these five key ratios—price-to-earnings, PEG, price-to-sales, price-to-book, and debt-to-equity—can help investors understand a stock's true value. Figuring out a stock's value can be as simple or complex as you make it. It depends on how much depth of perspective you need.
What is a good inventory turnover ratio? For most industries, a good inventory turnover ratio is between 5 and 10, which indicates that you sell and restock your inventory every 1-2 months. This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently.
A popular rule of thumb is the "100 minus age" rule, which suggests subtracting your age from 100 to determine the percentage of your portfolio that should be in stocks, with the remainder in bonds and safer assets. For example, a 30-year-old would invest 70% (100-30 = 70) in stocks and 30% in bonds.
The ratio between any two consecutive numbers in the Fibonacci sequence approaches the Golden Ratio, which is approximately 1.618. The Golden Ratio is used in the stock market in the form of Fibonacci retracement levels. These levels are used to predict areas of support and resistance in a stock's price movement.
A 60-40 portfolio also subjected the investor to losses only 11.9% of the time instead of 18.6% with an equity-only portfolios. A 100% equity portfolio delivered a portfolio CAGR of 15.86% against 13.5% on the 60-40 portfolio.
Current Ratio = Current Assets/Current Liabilities
The outcome indicates the number of times this company in question could pay off its immediate liabilities with its total current assets.
Buffett's Strategy
Warren Buffett, the greatest value investor of this century, now tends to buy stocks with a P/B ratio of around 1.3.
A healthy equity ratio is usually between 30% and 50%, depending on the industry and the company's specific business environment.
A healthy blood pressure reading should be lower than 120/80 mmHg. Normal blood pressure is less than 120 mmHg systolic and 80 mmHg diastolic (see blood pressure chart below), and may vary from 90/60mmHg to 120/80mmHg in a healthy young woman.
Apple (AAPL) PE Ratio (TTM) : 38.55 (As of Jan. 14, 2025)
The P/B ratio has been favored by value investors for decades and is widely used by market analysts. Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified.
A good PE (Price to Earnings) ratio in India usually falls between 12 and 20, indicating that a company's stock is neither overvalued nor undervalued. This range balances risk and growth potential, making it ideal for Indian stock market investment.
Debt to Equity Ratio
This key ratio is comparing the debt to the equity in the company. Warren Buffett prefers a company with a debt to equity ratio that is below . 5. In other words, for every $10 in equity the company should only have $5 in debt.
If you are a moderate-risk investor, it's best to start with a 60-30-10 or 70-20-10 allocation. Those of you who have a 60-40 allocation can also add a touch of gold to their portfolios for better diversification. If you are conservative, then 50-40-10 or 50-30-20 is a good way to start off on your investment journey.
Lower P/E Ratios can sometimes be a sign that a stock is undervalued relative to its earnings. A better way to tell if a stock has a good P/E Ratio is to compare it against industry averages and growth expectations. Average P/E Ratios generally range from 20 to 25.