Financial Ratios

Standard deviation is a measure of variation of a dataset relative to its mean. In finance, this statistic can be used to measure an asset’s relative riskiness. Standard deviation is flawed in that it treats all outliers and extreme values as risk, even if the source of the uncertainty is in an investor's favor.

The compound annual growth rate (CAGR) refers to the annual growth rate of an investment over time, assuming any profits are reinvested at the end of each period of its life span. Although it isn’t a true return rate, CAGR is considered one of the most accurate means of calculating and determining returns for anything that can increase or decrease in value over time. However, CAGR ignores volatility and does not account for an investor adding or withdrawing funds from a portfolio, among other limitations.

Discounted cash flow (DCF) is a model for estimating how much an investment will be worth based on its expected future cash flows. If an investment’s DCF is calculated as being greater than its present cost, then it may result in positive returns. Because investors can only estimate future cash flows and the value of investments, DCF has the potential to be inaccurate.

Cost of goods sold (COGS) is the total amount a company paid to produce and sell its products. COGS includes the cost of materials and labor directly used to create a good, excluding indirect expenses. This metric is listed on a company’s financial statements and is subtracted from its revenues to calculate its gross profit.

Price elasticity of demand is a measure of how sensitive the demand or supply for a good is relative to its price. If a good is elastic, then its demand or supply should increase or decrease as its price goes down or up, respectively. If a good is inelastic, then its demand or supply should have little to no effect on its price.

The debt-to-equity (D/E) ratio is used to both indicate how much financial leverage a company has and compare its total liabilities to its shareholder equity. Companies that have a high D/E ratio generally represent riskier investments. Although the D/E ratio is an important metric in corporate finance, it’s less useful as a comparison tool, given that the ideal level of debt will vary from one industry group to another.

Earnings per share (EPS) is the value of a company's net income per the outstanding share of its common stock. In other words, EPS measures how much money a company earns for each share, which makes it an effective metric for estimating profitability. Companies with high EPS are also considered more valuable to investors, given their higher profits relative to their share price.