How can I use financial ratios to assess the stability of a stock?

Financial ratios help investors analyze a company's stability before investing. By checking key ratios, you can assess profitability, debt levels, liquidity, and overall financial strength. Understanding these ratios makes stock investment decisions smarter and more informed.

1. Profitability Ratios

Profitability ratios measure a company's ability to generate profit relative to its revenue and expenses.

• Earnings Per Share (EPS): Higher EPS indicates better profitability.
• Return on Equity (ROE): Measures how efficiently a company generates profit from shareholders’ equity.
• Net Profit Margin: Shows the percentage of revenue left as profit after all expenses.

2. Liquidity Ratios

Liquidity ratios assess a company’s ability to cover short-term debts.

• Current Ratio: A ratio above 1 indicates the company can cover short-term liabilities.
• Quick Ratio: Measures liquidity excluding inventory, ensuring better debt coverage.

3. Debt Ratios

Debt ratios show how much debt a company has compared to its equity or assets.

• Debt-to-Equity Ratio: A lower ratio means the company relies less on borrowed funds.
• Interest Coverage Ratio: Determines if a company can cover interest expenses with earnings.

4. Conclusion

Using financial ratios helps assess the stability of a stock and make better investment decisions. Analyzing profitability, liquidity, and debt ratios ensures you invest in financially strong companies.