What are the three most important ratios that you should be looking for when evaluating a business?
You may seem it has to be a debt-to-equity ratio, but it is not in the top three.
So now, without much ado, let’s squint at the three most crucial ratios to consider when investing.
ROCE
The most important of all ratios is ROCE, or return of wanted employed.
Every merchantry needs wanted to expand and grow. So if a visitor can generate returns largest than the stock-still petrifaction rates in the market, it makes sense to invest in that business.
For example, I tell you to requite me 10L Rupees at 4% annualised returns. But, you will ask, why should I requite it to you when a wall offers me 8%?
The same applies when partnering with anyone in the stock market. If a merchantry cannot generate returns largest than a unrepealable level, there is no point in investing in that business.
I prefer ROCE to be whilom 15 or 20 per cent, and you will seldom find a visitor where I have invested has a ROCE of under 10.
There are one or two exceptions that I have invested in my unshut portfolio, and generally, it has been invested with the viewpoint that the ROCE is improving.
However, if it is not improving, either I am out of it or, in some cases, I have very little exposure to the other ratios stuff very, very good for it, and ROCE will modernize over a increasingly extended period.
OPM
The second most important ratio I squint for is the operating profit margin or OPM.
You know that I prefer to invest in companies that have little to no competition. So, they are unique businesses.
Once the businesses are unique, they can demand much better-operating profit margins considering they can sell the product at a much higher price than the forfeit of the product itself.
OPM helps me understand how good is the pricing power for the business, the competitive landscape, as well as the domain expertise of the team.
Again, you seldom find companies in my portfolio with a single-digit OPM.
Again, every rule has an exception, with one or two exceptions. The reason is that the OPM is set to increase in the near future as the management focuses on increasing the OPM.
Companies are in the early growth stage of the business. So they may have to take a hit on the OPM, but once they start to optimise their merchantry processes, the OPM will increase.
Future Growth
The third and most important ratio I consider when investing in a visitor is the past 5 and 10 years’ growth and what growth I expect in the next ten years.
I am a growth investor and not a value investor.
What I midpoint is I invest in high-growth companies misogynist at a reasonable price than looking for value companies misogynist at a discounted price.
In other words, I don’t squint for companies misogynist at a very low price-to-earnings ratio. So I don’t expect the price-to-earnings ratio to expand.
Instead, the companies alimony growing, and plane if the PE Ratio comes down, I still make decent CAGR returns.
So, I am looking for companies that can do profit growth of at least 25 to 26 percent if the visitor has been doing it in the past and can alimony doing it in the future (organic or inorganic).
So, once I expect the profit to protract growing at 26 percent, the share price will have a decent CAGR plane if the PE contracts to half or one-fourth.
Final Thoughts
If I have to segregate the fourth and fifth one, it will be self-ruling mazuma spritz and the debt-to-equity ratio.
I know self-ruling mazuma spritz is moreover important, but mazuma flows are often good when a visitor has a ROCE of 15 to 25 percent.
So these are some crucial ratios I squint for surpassing analysing any business. What are your most important ratios when investing in a business? Please share them in the comments below.