How To Use Financial Ratios To Make Better Decisions

Financial Ratios help you evaluate a company. Most financial ratios will show you how much money you're paying for a specific piece of the business. Let us give a few examples:

Price-to-Sales Ratio = Market Cap / Sales

The Price-To-Sales ratio or PS ratio tells you how expensive a company is relative to its total sales. The formula is calculated in two different ways: divide the company's market capitalization by its revenue or divide the current stock price by revenue-per-share. Because this ratio is being calculated with live price information, you can also watch it in real-time on the chart as we've shown in this example above.

If a company has a market cap of $10 billion and revenue of $1 billion, well that, that implies a PS ratio of 10. You're paying $10 for every $1 in sales. You can do ratios like this for all aspects of the company. For example, PE ratio or Price-To-Earnings ratio measures the Market Cap / Earnings . This tells you how much you're paying for every dollar of earnings .

Keep in mind that Financial Ratios are not perfect. They are also not a buy or sell recommendation. Instead they are shortcuts, ways to quickly evaluate a company, compare its underlying fundamentals, and study that company relative to other companies. You also must remember that financial metrics can change quickly with a single earnings report. A company's future expectations are also just as important. A company like Apple might have a high PE ratio, but if they're building and growing revenue into the future, their PR ratio could come down over time.

Remember, Financial Ratios and Financial metrics in general paint a picture of the underlying business and its earnings potential. Here are some other resources to get you started:

1. Read more about Financials on TradingView in our Help Center.
2. You can also code your own strategy or indicator using this financial information.
3. We've also created a library in our Help Center so you can learn more about every Financial metric.

Here are some other financial ratios that you may find interesting and how they're calculated:

PE Ratio = Market Cap / Earnings
PB Ratio = Market Cap / Book
PEG Ratio = PE / Earnings Growth
Quick Ratio = (Cash + Cash Equivalents + Current Receivables + Short Term Investments) / Current Liabilities
Dividend Yield = Dividends Per Share / Price
EV Multiple = Enterprise Value / EBITDA

To access all of the Financial Ratios available to you, click the Financials button at the top of your chart. From here, you can select many different Financial metrics and study markets at a deeper level.

More importantly, you can combine the study of Technical and Fundamental analysis at the same time. Meaning you can evaluate the fundamental side of the business including its earnings and valuation while ALSO studying price action and planning a trade.

Please feel free to share your feedback and comments below! Thank you for reading.

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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.