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5 Ratio To Consider When Choosing A Penny Stock To Invest In

Posted by : Premraj | Posted on : Thursday, October 12, 2017

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One of the most powerful ways to choose a profitable penny stock that is worth investing your money in is to look at some of the financial ratios of the company you are investing in.

A ratio is simply a number of the financial results of a company that is divided by another number. It’s a quick, simple, and yet highly effective way to gauge the financial stability of a company and to determine whether they have a bright future or not.

Here are five ratios that you should consider when choosing a new penny stock to invest in:

Current Ratio 

The current ratio is arguably the most important financial ratio to analyze. The current ratio is calculated simply by dividing the total assets of a company by their liabilities. The resulting number will indicate to you whether the company is currently capable of paying off their debts and liabilities with their assets. Steer clear of any companies who have a current ratio of 1 or less.

Price to Sales Ratio 

The price to sales ratio is calculated by dividing the share price of a company’s penny stock by their sales. This will tell you if your investment will be over valued or under valued. As an example, if the shares of a company are trading at $2.00 but the company had sales of $1 per share, the price to sales ratio would be 2.0. A lower value is better for penny stock investing than a higher one.

Inventory Turnover Ratio 

The inventory turnover ratio of a company indicates to you how successful they are at selling their products. For example, a company that can produce and sell its inventory ten times each year will be twice as effective as one that can do it five times.

Of course, the inventory turnover ratio will vary significantly by company. A company that sells pens and pencils is going to have a higher inventory turnover ratio than a company that sells automobiles.

Operating Cash Flow Ratio 

The operating cash flow radio takes the cash flow of a company and then divides it by their liabilities. This tells you which liabilities the company of a penny stock can pay for in cash over the next year. A higher operating cash flow ratio is superior to a low one.

Debt Ratio 

Finally, pay attention to the debt ratio of a company, which simply divides their total liabilities by their total assets (essentially the reverse of a current ratio). As a golden rule of thumb, only consider investing in companies with a debt ratio of at least 2. Avoid investing in any companies with a debt ratio of 1 or less. Some financial experts believe that you should only invest in companies with a debt ratio of 4 or higher even.

Penny Stock Ratios 

Financial ratios are not something you want to overlook when investing in penny stocks. These are the top five most important ratios that you need to pay you attention to.

 

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