Useful Ratios For Small Cap Stocks Investments

Useful Ratios For Small Cap Stocks Investments

When you’re evaluating Small cap stocks with the view to making a purchase for your portfolio, that calculator is going to be a very big help in enabling you to make an informed choice. Take a cue from the serious investors, who analyze the figures and ratios related to the stocks.

Price to Earnings Ratio (P/E)

The P/E is a number that looks at the relationship between the company’s earnings and the price of its stocks. Of all the ratios used for fundamental stocks analysis, this is the most popular. The P/E ratio is calculated by dividing the share price over the company’s EPS, or Earnings Per Share. This will give you an idea of how much the market is willing to pay for each share, and whether a company’s Small cap stocks are high or low relative to its earnings.

A high figure may indicate that there are high hopes for this company’s stocks in the market. On the other hand, it may also be a sign that the company’s stock is overpriced. A low figure could mean that the market doesn’t trust the stock, or that it may be a diamond in the rough and still undiscovered.

Earnings Per Share (EPS)

Earnings per share is computed as the company’s net earnings over its outstanding shares. This figure is helpful in comparing a company’s Small cap stocks with another, in the same industry. Comparing the EPS of a telecomm company with a startup healthcare provider would be like comparing apples to grapes. Don’t take the EPS alone. To be able to make a more informed choice, use this figure to compute for other ratios.

Projected Earnings Growth (PEG)

This figure is computed by dividing the price to earnings ratio over the projected earnings growth. This number helps you estimate the company’s potential for future growth. The higher the number, the more you are willing to pay for each share of future earnings growth. A low P/E with a low projected earnings growth could be a sign that this is an expensive investment, while a high P/E with high projected earning growth indicates that the stock may be a good investment.

Price to Sales Ratio (P/S)

Some companies’ startups ‘may be too young to have any earnings, but may be worthy of consideration. The price to sales ratio allows you to determine a Small cap stock’s potential through the stock price relative to the company’s sales. The price to sales ratio is computed by taking the stock price and dividing it by the sales price per share. The lower the P/S, the better the value of the stock.

Price to Book Ratio (P/B)

Another indication of the potential of Small cap stocks is the price to book ratio. This is computed by taking the price per share and dividing it by the book value per share. The lower the price to book ratio, the better the value of the Small cap stocks would be. This ratio tells you how much the market considers the book value of the company.

Dividend Payout Ratio (DPR)

This is computed by taking the dividends per share and dividing it by the earnings per share. Newer and smaller companies would tend to have a lower dividend or none at all, as they would retain their profit to fund their growth. Bigger and more mature companies tend to pay more and bigger dividends.

Dividend Yield (DY)

The dividend yield is a number that indicates what percentage return a company pays out to its stockholders through dividends. Usually, older and more stable companies will reflect a higher percentage, and their dividend histories are more consistent. The dividend yield is computed by taking the annual dividend per share and dividing it by the stock’s price.

Book Value (BV)

One way of determining a Small cap stock company’s worth is through the book value, which is computed by subtracting the company’s liabilities from its assets. A growing company with a good growth potential would be worth much more than its book value.

Return on Equity (ROE)

The ROE is a measure of determining how well a company uses its assets to produce earnings. This is computed by dividing the net income by book value. Companies selling Small cap stocks that show how consistently they can squeeze out more profits with the assets they have are generally better investments. The ROE becomes even more useful when you look at the company’s figure over a number of years, say the last five years.

When evaluating Small cap stocks through these ratios, we suggest that you compare companies within similar industries. Don’t take one ratio and base your purchase decision on that one ratio alone; use a combination of ratios, and consider other information about the company as well before you buy any Small cap stocks.

Nir Dotan is a writer and promoter of
Small Cap Stocks
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