The Impact of Financial Ratios on Stocks performances: What every investor should know!
Project By: Timothy Yang | Edited By: Timothy Yang
Whether you’re an experienced investor or beginning your journey into the world of investing, awareness of financial ratios and the effect they have on stocks performances can have a big impact on your investment strategies. Financial ratios are helpful in creating a clearer view of a company’s health, efficiency, and market value and yes, they usually do foretell how well stocks will perform.
Why do Financial Ratios Matter?
Ultimately, financial ratios are tools to assess a company’s financial statement. Ratios reveal stories, stories about profitability, risks, growth potential and efficiency. When investors assess financial ratios, they are looking for indicators of a stock’s strong (or weak) future.
But which ratios matter the most?
In my research here are the top 2 in my opinion the most useful ratios, with each category including specific ratios that help companies evaluate different aspects of a company. Ratios like return on assets (ROA) and return on equity (ROE) are type of ratios called profitability ratios, they measure a company’s ability to generate profit relative to revenue, assets, or equity and is important for companies to attract more investors. Finally, valuation ratios are price to earning (P/E) ratios which help investors determine if a stock is overvalued, undervalued, or fairly priced, reflecting investor sentiment and expectations about future performance.
