If you invest in the stock market or are thinking of investing in the future, then you should know how to check the fundamentals of a share before buying it. You should understand what the Stock P/E, ROCE, ROE, Book Value and Face Value of a stock indicate. What does this mean? Let us tell you about it in detail.
What to look for in fundamentals
When you look at the fundamentals of a stock, you pay close attention to some things. Like- market cap of the company, its 52 week high and low, stock P/E, ROCE, ROE, book value and face value. On the basis of these you decide how right it would be to invest in shares. Actually, these things help investors to understand the financial position of the company and its future prospects.
Understand the P/E ratio (Price-to-Earnings Ratio)
The P/E ratio tells how many times the price of a company’s stock is its earnings per share (EPS). That is, how much price are investors paying for one rupee profit of the company. Now understand high P/E and low P/E.
High P/E means the stock is expensive. But, it could also mean that the market sees better prospects for the company’s future growth. Whereas, low P/E. This shows that the stock is cheap, but it can also be a sign of lack of growth or risk for the company.
Understand ROCE (Return on Capital Employed)
ROCE measures how much profit a company is earning using its total capital. There are highs and lows in this too. High ROCE shows that the operating efficiency and finance management of the company is good. Whereas low ROCE shows that the company’s money is not being used in the right place. This means that the possibility of profit from the company where it has invested is less.
What does ROE (Return on Equity) show?
ROE shows how much profit the company is earning from its shareholders’ capital.
A higher ROE shows that the company is using its investors’ capital in a better way. Whereas, low ROE is an indication that the company has low income or problems in operations.
Meaning of book value and face value
Book Value is the amount remaining after deducting the liabilities of a company from its assets. It shows the intrinsic value of the company’s shares. Whereas, Face Value is the nominal price that is written on the share and it is usually decided at the time of issuing the IPO. In simple language, it is used to measure the share capital in the balance sheet of the company.
Also read: How to read the balance sheet of any company, what things should be kept in mind
