Three Key Ratios For Investors

February 27th, 2010 value investor 9 comments Print Investment Article Print Investment Article Email Investment Article Email Investment Article

if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I’ll take my shot at it, what would you pick?

1) Current Ratio

Current Assets / Current Liabilities


This ratio keeps track of the company’s ability to pay its short term debt. If a company doesn’t have safety money to deal with debt then they might not be in business tomorrow and I don’t need any of that.

2) Dividend Yield

Annual Dividend Per Share / Price Per Share


As a buy and hold investor I like to get paid to hold the investments. A nice yield makes for a little reward for patience.

3) Dividend Payout Ratio

Dividends/Net Income


Getting a great yield now is perfect, but how can you be sure that this dividend won’t get canceled as soon as you buy the stock- you don’t. One way of keeping an eye on this is to look at the payout ratio. If too much of the income is being eaten up with a dividend then beware that dividend might get cut or at least it sure isn’t going to increase in the near future.

4) Dividend Growth Rate


If a company increases its dividend on a regular basis the returns over the long term can be jaw dropping. The future of a dividend can be more important than the present.

So how about you, if you only had four ratios what would you use?

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9 responses to “Three Key Ratios For Investors”

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    Financial Uproar

    Mine would be:

    1) Current Ratio- Ditto to your comments

    2) Price to Book- I like buying a dollar for less than a dollar. I’m cheap like that.

    3) Debt to Equity- I try to avoid companies with lots of debt

    4) Dividend Yield- While a dividend isn’t really that important to me if I like a company, I do like to get paid. Even if the company is about to be cut.

    Matt @ Dividend Monk

    I like your list. My third three would likely all be the same as yours: dividend yield, payout ratio, and growth rate.

    I’d probably use one of two different metrics in place of current ratio, though. Likely I’d replace it with LT Debt/Equity for large companies and Insider Ownership for small companies.


    1) net current price to book ratio, I like knowing what the company would be worth if it went bankrupt compared to market price.
    2) debt to equity , this is interesting to me because it shows how leveraged the company is.
    3) current ratio, ditto
    4) average price to earnings over the last 5-10 years depending how long the business has existed. Shows that the company can be profitable.

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    As an investor, why would you invest in a company that doesn’t pay dividend on a regular basis?

    value investor

    I would agree with you. I like to see a solid dividend- otherwise it starts to look more like gambling rather than investing.

    Shannon Kawane

    I like current ratio. I think payout ratio is good to evaluate sustainability and if the company has the right priorities (ie, too much payout compared to capital investment). I recommend focusing on other ratios that are closer to the source of dividends. Ratios like Price/Sales and Sales Growth Rates. A company that doesn’t know how to grow its sales will not be successful in maintaining its dividend.

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