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
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?