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Ploughback/reserves: Every year, a company divides its net profit (profit left after subtracting various expenses including taxes) in two portions: ploughback and dividends. While dividends are handed out to the shareholders, ploughback is kept by the company for its future use and is included in its reserves.

Reserves are also known as shareholders' funds, since they belong to the shareholders. If a company's reserves are twice its equity capital it can then reward its shareholders with a generous bonus. Also any increase in reserves will push the share price of your share.

Book value per share: This ratio shows the worth of each share of a company as per the company's accounting books. It is calculated as:

Book Value per share = Shareholders' funds / Total quantity of equity shares issued

Earnings per share (EPS): One of the most popular investment ratios, it can be computed as:

Earnings Per Share (EPS) = Profit Post Tax / Total quantity of equity shares issued

Price earnings ratio (P/E): This ratio highlights the connection between the market price of a share and its EPS.

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

Dividend & yield: Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don't have much of growth to talk about.

This is because the ploughback required to finance future development is insufficient. Similarly, those companies in high growth sector don't give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends.

So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares. Yield (dividend yield) can be calculated as:

Yield = (Dividend per share / market price of a share) x 100

Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.

Return on capital employed (ROCE): ROCE is the ratio that is calculated as:

ROCE: Operating profit / capital employed (net value + debt)

Return on net worth (RONW): RONW is calculated as:

RONW = Net Profit / Net Worth

PEG ratio: PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced.

To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company's shares. Vice versa also holds true.

PEG = P-E ratio / expected growth rate of the EPS of the company

In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell.

Source: Rediff >> read more

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