The Ease of Movement (EMV) indicator measures the degree to which prices can be moved by a lower volume of trading. It was developed by Richard Arms, inventor of the Arms Index, which also attempts to quantify the relationship between price movements and volume. High positive values indicate a present tendency for prices to increase on low volume, and larger negative values indicate that prices are slipping lower but with relatively low trade volume. Continue reading...
W.D. Gann developed a suite of technical analysis tools around the 1930s, with Gann Fans being among the most essential in his toolkit. Gann fans are a collection of lines placed on a price chart that, in theory, help traders gauge potential price changes. Gann theorized that prices were likely to be sequentially bound by markers; that is, if a price broke through one marker, it would be likely to use the next ones as its new support or resistance level. The range between the lines gets wider the further they extend from the origin, which makes Gann fans suitable for long-term charting in which the number of traders and the size of total market cap grows over time. Continue reading...
Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...
The current ratio is a measure of a company’s immediate liquidity, calculated by dividing current assets by current liabilities. The value of this ratio lies in determining whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are sufficient enough to pay-off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). Generally speaking, the higher the current ratio, the better. Continue reading...
The debt ratio measures a company’s total debt to total assets. It is the simplest calculation available for determining how indebted a company is on a relative basis. The debt ratio is crucial for determining a company’s financial standing, and should be considered by potential investors. To calculate the debt ratio, one only needs to divide total liabilities (i.e. long-term and short-term liabilities) by total assets. Continue reading...
The capitalization ratio measures a company’s leverage, or the amount of long-term debt it holds relative to long-term debt + shareholder equity. Essentially, it is a measure of how capitalized a company is to support operations and growth. Continue reading...
The Herrick Payoff Index is one of the only technical indicators to combine price, volume, and open interest data for the analysis of futures, commodities, and derivatives. The Herrick Payoff’s main function is to elucidate whether money is flowing into – or out of – the derivative instrument in question. It can be useful for spotting divergences that may occur before prices change direction, or for confirming price trends. Continue reading...
The Price to Earnings ratio is a company’s stock price relative to its net income per share. A low P/E indicates that a stock is trading at a low premium to earnings, which may indicate that the market thinks low relative growth rates are ahead for the company. A company with a high P/E means investors are willing to pay a premium for growth, perhaps anticipating high future growth rates for the company. The P/E ratio is calculated by dividing the market value per share of a company by its earnings per share. Continue reading...
The price to book ratio compares a company’s current stock market price to its book value (which is generally speaking a company’s net assets). To calculate, an analyst need only divide a company’s latest market price by it book value, which is calculated by taking ‘Total Assets minus Intangible Assets and Liabilities.’ The P/B ratio gives some idea of what premium an investor is paying if the company went bankrupt immediately. Continue reading...
The Price/Earnings to Growth Ratio (PEG Ratio) is used to determine a company’s value relative to its expected growth. The PEG ratio can be calculated by dividing a company’s P/E by its annual earnings per share growth. A lower PEG ratio may indicate that a company is undervalued relative to its expected growth, and a general rule of thumb is that a PEG ratio below 1 is favorable. Continue reading...
The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...
The Price to Sales Ratio, also known as the PSR, is a valuation metric that looks at a stock’s market price versus its per share revenue. Alternatively, you can calculate it by dividing a company’s total market capitalization by its total revenue in the most recent fiscal year. The ratio indicates how much value (how much investors are willing to pay) is placed on each dollar of revenue generated by the company. Continue reading...
The quick ratio (also known as an “acid test”) is a financial ratio used to measure how well equipped a company is to meet its short-term liquidity needs. It basically measures how much cash (or assets easily and quickly converted to cash) a company has available to meet its short-term liquidity obligations. Since inventories are assets but are not necessarily liquid, they are excluded from the calculation. Continue reading...
Solvency ratios come in several flavors, but they all seek to shed light on a company’s ability to pay its long-term debt obligations. There are several types of what is known as solvency ratios. Some examples of solvency ratios include debt-to-equity, debt-to-assets, interest-coverage ratio, the quick ratio, the current ratio, and so forth. These are meant to be metrics for a company’s ability to meet its debt obligations through various market conditions. The quick ratio, for instance, can reveal whether the current-year liabilities (payables) of a company are covered by the current year cash and receivables, or whether the company will depend on other sources such as inventory liquidation to meet this need. Continue reading...
A liquidity ratio is also known as a current ratio, and it generally measures the amount of cash or readily available cash relative to current liabilities. Liquidity ratios are important measures to test a company’s solvency, in addition to its potential ability to handle economic shocks. Continue reading...
The Sharpe Ratio is a risk-weighted metric for returns on investment. It measures whether an investment offers a good return for the amount of risk assumed by the investor. The risk/return trade-off is a positive linear relationship in most theoretical depictions – if an investor seeks greater returns, they will have to take on greater risk. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...
Generally associated with mutual funds and exchange traded funds, the expense ratio represents the total annual management fee. The expense ratio is the annual management fee charged to shareholders by ETFs and mutual funds. The annual fee typically comprises the annual management fee, 12b-1 fees (which are associated with research costs), operating costs, and all other administrative type fees that go into the product. The expense ratio encompasses all of these fees as one percentage. Continue reading...
Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations. They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company. Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on. Continue reading...
Turnover ratio is a term that can be used in reference to the rate at which a company goes through its physical inventory, or that a mutual fund sells and replaces its investment holdings. In the context of a company’s inventory of goods, a high turnover ratio is a positive sign. It means that a company is selling plenty of its products and is not wasting money on more warehousing space than it needs. This kind of turnover ratio is calculated as the cost of goods sold in a period divided by the average inventory during that time. In the context of mutual funds and ETFs, turnover ratio is a negative thing if it is high. Continue reading...
The debt-to-capital ratio is a measure of a company’s leverage that looks at total debt compared to total capital (shareholder equity + debt). This measure of leverage is not a globally accepted accounting practice, therefore it is important for analysts to learn exactly what is being included by the company as their debt and equity in calculating the ratio. Generally speaking, a higher debt to capital ratio indicates that the company is financing more of its operations and needs through the debt markets versus with equity. Comparing debt-to-capital ratios amongst companies within the same sector or industry can be a useful exercise. Continue reading...