This document discusses several tools for analyzing stocks before investing: - Liquidity ratios like current ratio and acid test ratio indicate a company's ability to meet short-term obligations. An ideal current ratio is 1:1. - P/E ratio shows what investors pay for each rupee of earnings. It should be compared to historical, industry, and market P/E ratios. - Debt-to-equity ratio indicates the amount of debt relative to shareholder equity. It is better for this ratio to be low, but debt can enhance value if returns exceed interest costs. - Operating profit margin shows operational efficiency and pricing power over time compared to industry peers.

1. Tools for analysing stocks
before investing
- TITAN APAIBI

2. Liquidity
It is important for investors to look into a company’s liquidity position before
investing.
High Current ratio signal that the company won’t be affected by working capital
issues.
Ideal CR – 1:1
Better check acid test ratio for liquidity, because current assets includes stock and
receivables.

3. P/E ratio
 This ratio shows how much investors are paying for each rupee of earnings.
 The ideal P/E ratio can be known by comparing current P/E with historical P/E ,
the average industry P/E and market P/E. Although the company is having a
higher P/E as compared to its historical price, it might still be lower than the
industry P/E and market P/E. It is explained below with an example.
 Eg. P/E – 15 (expensive as compared to its historical P/E) , industry P/E – 18,
market P/E – 20.
 Investors should be smart enough to know company’s tricks. Sometimes,
companies add debts to boost their P/E ratio, which helps in constructing equity
capital.

4. Debt to equity Ratio
 It shows how much debt is involved in the business in regard to promoter’s capital
(equity).
 A low figure is considered better. But it should not be seen in isolation.
 If the company’s returns are higher than its interest cost, the debt will enhance
value. However, if it is not, shareholders will lose.
 A company with low debt-to-equity ratio can be assumed to have a lot of scope
for expansion due to more fund-raising options.

5. Operating profit margin
 It shows operational efficiency and pricing power.
 OPM = operating profit/Net sales
 It is compulsory for investors to see if a company’s OPM has been raising over a
period. Investors should also compare OPMs of othercompanies in the same
industry.

6. Return on Equity
 ROE = Net income/shareholders equity.
 15-20% ROE is considered good.
 A rise in debt will also reflect in a higher ROE, mostly in capital intensive business.

7. Interest Coverage Ratio
 Formula- EBIT/Interest expense.
 It indicates how solvent a business is , and the number of interest payments the
business can serve solely from operation.