Metrics key for new investors

Learn these four to get a better picture of a company’s health

Question: I’m new to stock investing. What are the most important metrics I should know?

Answer: There are dozens of metrics that can be useful when evaluating stocks, but there are certainly some that are more important. Here are four 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 in which 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 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, 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.

Keep in mind these are best suited for comparing similar businesses with one another.