Seven Top Ratios for Investors

Seven + Seven Simple Top Ratios Investors Should Know 

Here are seven simple ratios for the world of stock market investing and seven for real estate investing. Yes, there are more and there are more sophisticated and more complicated approaches to measuring performance or valuation however we shall leave those out of our current brief presentation as real estate should be a simple investment for everyone to consider. 

Investing in the financial world…

In the world of stock market investing a few of the top ratios that investors should know, understand, and use to assist them to analyze a good investment opportunity from time to time are the following; 

P/E Ratio = Share Price / Earnings per share

This tells us how much is paid for a dollar of a company’s reported profit. The lower the better for the investor buyer, the higher the better for the seller. The higher the riskier the investment.  

ROE = Return on Equity = Net Income /Shareholder Equity

This measures how well the company is performing on equity, the higher the better for the investor.

Current Ratio = Current Assets / Current Liabilities

Measures short term liquidity, the more liquid the better for the company and investor. 

Debt to Equity = Total Debt / Shareholder Equity

This tells us how leveraged a company is, the lower the number the lower the riskiness. 

Price to Book Value = Share Price / Book Value per Share

The amount a company trades for versus its net assets.

PEG Ratio = Price to Earnings Ratio / Earnings Growth Rate

This measures the price to earnings ratio using growth. 

NAV = Net Asset Value = Value of Assets – Total Debts

When you take the total value of the assets of the company and deduct its total debts the result is its net asset value. This gives a better perspective as to the value an investor should pay when buying into the company subject to any premium or discount that may be applied by the investor. 

Investing in Real Estate …

Here are seven simple ratios for real estate investing, that can assist the investor to quickly measure performance and valuation for a single period.

Value = Net Operating Income / Capitalization Rate   ,  or alternatively 

ROI = Capitalization Rate = Net Operating Income (NOI) / Value

This simple formula can assist the investor when two variables are known to solve for the third

Either Value or the ROI = Return on Investment. The higher the capitalization rate the lower the value and the opposite is true the lower the capitalization rate the higher the value. So is the investor a buyer or a seller of this investment, that will determine which is more attractive. 

Leverage Ratio = Loan / Value

This ratio tells the investor the level of debt (mortgages) relative to the value (purchase price) of the investment. The lower the ratio the lower the riskiness of the investment. 

Breakeven Ratio = Operating Expenses + Debt Service / Gross Operating Income

Also known as the Default Ratio, the lower this ratio the better for the investor as it would imply the lower the riskiness of the investment. The lower this ratio from 1.00 the better for the investor and the lender.

Debt Coverage Ratio = Net Operating Income / Debt Service

The higher this ratio the better from a lender’s perspective. The lender will establish the criteria, for example, a minimum of 1.30 could be a benchmark threshold.

ROE = Cash on Cash = CFBT / Equity 

This ratio tells the investor how their invested dollars (equity) are performing in the investment after expenses and debt are removed but before tax liability on the operational profit (gain for a single period). The investor could also apply the cash flow after tax (CFAT) to view the results on an after-tax basis. 

Payback Period = Equity / CFBT

This ratio tells the investor how long it may take to recover their original dollars invested based upon the cash flow before tax for a single period assuming all items remain the same for that timeframe.

GIM or GRM = Sale Price / Gross Operating Income

Gross Income Multiplier also is known as Gross Rent Multiplier

The lower the GIM (or GRM) the better for the buyer investor. If an investor had a GIM either developed from the research of good comparables sold recently and they can obtain the financial statements of the seller (owner) they could quickly calculate a valuation (sale price) of the investment.

Remember Value is composed of Equity plus Debt.   Value = Equity + Debt.

A change in one affects the others.

In a perfect world, an investor could obtain reliable financial information to be able to do quick calculations and determine whether the investment opportunity meets or exceeds their criteria and expectations. 

Good luck out there in the marketplace jungle. 

Be prepared, and expect surprises.

Envoy Capitol Realty Inc., Brokerage is here to assist you, your family or corporation in analyzing real estate opportunities, reviewing your current portfolio of properties or to help you start up in your journey of real estate acquisition.

The above was meant for discussion and educational purposes and is not meant to be financial, legal, tax , engineering or environmental advice.

All real estate investments are unique and it is most appropriate to consult with the right educated, registered and insured professional before taking any action.

Envoy Capitol Realty Inc., Brokerage is always in search of great people to join our team of professional to serve the best interest of clients in Ontario.

Reach out and let’s have a virtual coffee and discuss your real estate and your career in real estate.

Check out our books on Amazon ;

The Greatest Money Machine

Silver Bullet Investing

Our email : capitalmoves@gmail.com [ We are here for you. ]

3219 Yonge Street, Suite 227, Toronto Ontario M4N 3S1

(416) 441-6163