Q: I'm new to stock investing. What are the most important metrics I should know?
There are dozens of metrics that can be useful when evaluating stocks, but there are certainly some that are more important. Here are the four that I would suggest new investors learn first.
The price-to-earnings (P/E) ratio is the most widely used valuation metric, and can be simply calculated by dividing a stock's current price by its annual earnings per share. This tells you how much investors are willing to pay for every dollar of a company's profits.
There's also the price-to-sales ratio, which can be useful in situations where a company's recent earnings don't paint an accurate picture. Simply divide a company's market capitalization by its annual revenue.
The price-to-earnings-growth ratio, or PEG ratio, values a company based on its future growth potential, not its current earnings. This is most useful for valuing tech stocks or other rapidly growing companies that don't have high profits just yet. To calculate, divide a stock's P/E ratio by its expected earnings growth rate.
Finally, it's important to know the debt-to-equity ratio, which is a major component of a company's financial health. Lower is generally better, and you can calculate it by looking at a company's balance sheet and dividing total liabilities by its stockholders' equity. Use this along with the previous three metrics to get a better picture of a company's valuation relative to its financial condition.
Keep in mind these are best suited for comparing similar businesses with one another. For example, companies in different sectors tend to have different relative debt loads, so comparing the debt-to-equity ratio of a tech company with a bank isn't necessarily useful.