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The 5 Most Accurate Financial Ratios

Summary

34 financial ratios are tested with data from 4,400 different companies traded on the NYSE and the NASDAQ.

The ratios are evaluated according to the relationship between the companies' rates and the range within the industry.

The five ratios with 100% accurate buy and sell signals on the most number of companies are Revenue/Employee, G&A/Revenue, Debt/Equity, Asset Turnover, and Dividend Yield.

The 5 Most Accurate Financial Ratios When you are researching stocks trying to decide what to buy or sell, you have to go through a lot of data. It can be hard to know what numbers you should pay attention to and what they are telling you about the future stock price. Using data from the StockMetrix app, you can analyze a company’s financial ratios and evaluate their future stock return prospects. You can even use the app to backtest a strategy to see how well your portfolio would have performed using the strategy with past data. StockMetrix has run through the data to give you their five most accurate financial ratios.

Methods

StockMetrix tested 34 different financial ratios with data from 4,400 different companies traded on the NYSE and the NASDAQ. Each ratio for each company is evaluated on how the ratio compares to the rest of the companies in the industry. The company receives a score from 0 to 10 where 10 is the best and 0 is the worst. StockMetrix then shows whether the ratio indicates a buy signal, a neutral signal, or a sell signal. The signal represents the relationship between the company’s ratio and the range within the industry. Different industries have different normal ranges for each ratio, so it is important to evaluate the ratio in the context of other companies in the same industry.

A signal is accurate if the stock price moves up in the period following a bullish signal or moves down in the period following a bearish signal. The accuracy of a ratio is determined by adding all correct bullish and bearish signals and dividing by the total number of signals for the ratio. For example, the accuracy of 90% means that the signal for the ratio correctly forecasted the direction of the stock’s movement 90% of the time in all companies.

Results

StockMetrix signals on these 5 ratios provided 100% accurate buy and sell signals on the most number of companies.

1.Revenue/Employee

Revenue per employee measures the average amount of revenue the company generates per each employee. After revenue per employee is calculated for a given company, it is compared to other companies in the same industry and adjusted for any outliers. Higher values are a good sign of the company’s effectiveness in generating revenue while managing operating costs. StockMetrix signals were 100% accurate for 1,172 companies in the sample.

2.G&A/Revenue

The G&A to Revenue ratio measures a company’s general and administrative expenses as a percent of sales revenue. These expenses are directly related to the company’s production of a good or service. So, the ratio measures how well the company controls its costs relative to the amount of revenue it generates. After G&A/Revenue is calculated for a company, it is compared to other companies in the same industry and adjusted for outliers. A lower value of this ratio is better because it indicates that the firm’s management is efficiently managing administrative costs compared to the revenue the company generates. StockMetrix signals were 100% accurate for 1,171 companies in the sample.

3.Debt/Equity

The debt to equity ratio indicates how much debt the firm has relative to the value of its shareholder equity. The relationship between debt financing and equity financing is referred to as a company’s leverage. After the amount of Debt/Shareholder Equity is calculated for a company, it is compared to other companies in the same industry and adjusted for outliers. A lower value of the ratio is a good sign because it indicates that the company has less debt financing relative to its available equity financing. Companies with higher debt to equity ratios are considered to be riskier because there is a greater chance the company could not meet its debt obligations during a downturn. StockMetrix signals were 100% accurate for 910 companies in the sample.

4.Asset Turnover

The asset turnover ratio demonstrates how well the company uses its assets to generate revenue. Asset turnover is calculated by dividing net sales revenue by average total assets. StockMetrix evaluates the company’s ratio relative to other companies in the industry and adjusts for any outliers. A higher asset turnover ratio indicates that the company effectively uses its assets to create revenue. A company would have a low asset turnover ratio if it invested a lot of money in equipment that does not create a corresponding level of revenue for shareholders. StockMetrix signals were 100% accurate for 909 companies in the sample.

5.Dividend Yield

Dividend yield represents the return on investment a shareholder receives as dividend income. It is calculated by dividing the amount of the dividend payment by the current market value of the share. After dividend yield is calculated for a company, it is compared to other companies in the same industry and adjusted for outliers. All else being equal, a higher dividend yield is a good sign that the company rewards shareholders with high dividend payments. Company policies about paying dividends can vary greatly by the industry as well as firm’s maturity. Younger firms in high growth industries tend to pay fewer dividends to shareholders because they retain the earnings to invest back into the company. StockMetrix signs were 100% accurate for 907 companies in the sample.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.