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Debt to Assets Debt to Asset ratios determine the proportion of external financing used to purchase business assets. A ratio of 0.6x indicates that 60% of the total assets are financed through external debt. It is calculated as: |
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It is generally assumed that the market value of a share reflects both the past performance and the expected performance of a company. It indicates how the company is perceived by the market, even though the market often misprices stocks. The market price of a share reflects a company’s profitability, growth prospects, risk characteristics, corporate image and liquidity position. Hence valuation ratios are considered to be a comprehensive measure of a company’s performance. The following are some of the most commonly used valuation ratios. |
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Financial ratios provide valuable insights into a company’s performance, efficiency and future growth prospects. However when analyzing a stock you must keep certain things in mind before interpreting these ratios. Ratios cannot be interpreted in isolation. They should be compared with industry averages and ratios of competitors in the industry. For example, a net profit margin of 10% may sound low, but it may be considered normal if the company is operating in the infrastructure industry. Similarly, ratios vary across industries. While a net profit margin of 12% may be outstanding for one type of industry, it may be considered as mediocre to poor for another. |
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Technical analysis and fundamental analysis are the two main approaches to valuating stocks in an effort to determine how prices might move. These approaches are actually complete schools of thought and as usually happens with the various disciplines studied in our society, the proponents of each are at odds with one another. Ideally, in my opinion, deploying both approaches to some extent, in tandem, will get the best job done. That, I suppose, results in a third approach, a combination approach, but lets not confuse the issue here. |
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