8 Simple Investing Ratios You Need To Know

The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. A high P/E ratio means investors are paying more for today's earnings in anticipation of future earnings growth.

The basic formula for calculating the P/E ratio is fairly standard. There is never a problem with the numerator - an investor can obtain a current closing stock price from various sources, and they'll all generate the same dollar figure, which, of course, is a per-share number.

However, there are a number of variations in the numbers used for the EPS figure in the denominator. The most commonly used EPS dollar figures include the following:

Basic earnings per share - based on the past 12 months
Estimated basic earnings per share - based on a forward 12-month projection

A stock's price/sales ratio (P/S ratio) is another stock valuation indicator similar to the P/E ratio. The P/S ratio measures the price of a company's stock against its annual sales, instead of earnings. Like the P/E ratio, the P/S reflects how many times investors are paying for every dollar of a company's sales. In this example the price of a share is divided by the sales ($3,286) which is adjusted for average share outstanding throughout the year (3,286/247.1). This results in paying 5.1 dollars for every dollar of sales.

The debt-equity ratio is a leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. A lower number means that a company is using less leverage and has a stronger equity position. This ratio is not a pure measurement of a company's debt because it includes operational liabilities in total liabilities, nevertheless, this easy-to-calculate ratio provides a general indication of a company's equity-liability relationship.

The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. In this example current assets are valued well over 2 times the current liabilities.