Hello Dear Investors,

This is the post that I am going to reference in my stock analysis articles so that it explains the terms that I am using.

## 𝗦𝗵𝗮𝗿𝗽𝗲 𝗥𝗮𝘁𝗶𝗼

The Sharpe ratio is used to help investors understand the return of an investment compared to its risk.

The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.

In simpler words, the ratio is the average return per unit of volatility.

Volatility is a measure of the price fluctuations of an asset or portfolio.

Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

You can read more here:

## 𝗦𝗼𝗿𝘁𝗶𝗻𝗼 𝗥𝗮𝘁𝗶𝗼

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns.

The Sortino ratio takes an asset or portfolio's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation.

You can read more about Sortino Ratio here:

## 𝗠𝗮𝗿𝗸𝗲𝘁 𝗖𝗼𝗿𝗿𝗲𝗹𝗮𝘁𝗶𝗼𝗻

Correlation is a statistical measure that determines how assets move in relation to each other.

It is measured on a scale of -1 to +1. A perfect positive correlation between two assets has a reading of +1. A perfect negative correlation has a reading of -1.

Modern Portfolio Theory states that adding assets to a diversified portfolio that has low correlations can decrease portfolio risk without sacrificing return.

The thing is that low correlation between assets means there will be positions going up when the others are going down, which reduce the overall portfolio volatility, i.e. risk.

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## 𝗦𝘁𝗮𝗻𝗱𝗮𝗿𝗱 𝗗𝗲𝘃𝗶𝗮𝘁𝗶𝗼𝗻 (𝘃𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆)

Standard deviation measures the dispersion of a dataset relative to its mean.

A volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low.

As a downside, the standard deviation calculates all uncertainty as risk, even when it’s in the investor's favor—such as above average returns.

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## 𝗖𝗼𝗺𝗽𝗼𝘂𝗻𝗱 𝗔𝗻𝗻𝘂𝗮𝗹 𝗚𝗿𝗼𝘄𝘁𝗵 𝗥𝗮𝘁𝗲 – 𝗖𝗔𝗚𝗥

This is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

Investors can compare the CAGR of two alternatives in order to evaluate how well one stock performed against other stocks in a peer group or against a market index.

CAGR does not reflect investment risk.

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## 𝗧𝗵𝗲 𝗽𝗿𝗶𝗰𝗲-𝘁𝗼-𝗲𝗮𝗿𝗻𝗶𝗻𝗴𝘀 𝗿𝗮𝘁𝗶𝗼 (𝗣/𝗘 𝗿𝗮𝘁𝗶𝗼)

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS).

The price-to-earnings ratio or P/E is one of the most widely-used stock analysis tools used by investors and analysts for determining stock valuation. In addition to showing whether a company's stock price is overvalued or undervalued, the P/E can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 Index.

You can read more here:

## Price to Earnings Growth Ratio (PEG Ratio)

Taking the previously described P/E ratio and dividing it by the growth rate of the company's earnings you get the PEG Ratio.

The information you get this way is the company's valuation considering also the expected growth.

The stock is considered more undervalued as the PEG Ratio is lower. To put in some numbers, a PEG ratio lower than 1 indicates undervaluation, while a value higher than 1 indicates overvaluation.

## Operating Cash Flow

Operating cash flow (OCF) is a measure of a company's financial performance that calculates the amount of cash generated by its ongoing, regular operations. It is typically calculated by adding cash received from sales, and subtracting cash payments for expenses, such as cost of goods sold, taxes, and operating expenses.

OCF is a key metric used to evaluate a company's liquidity and ability to generate cash flow from its core operations. It is commonly used by investors and analysts to determine the company's ability to pay dividends and meet other financial obligations.

### How is Operating Cash Flow Calculated

Operating cash flow is typically calculated using the following formula:

Operating Cash Flow = Net Income + Depreciation + Amortization - Changes in Working Capital - Capital Expenditures

Where:

Net Income is the company's income from operations before taxes and interest

Depreciation is the non-cash expense that reflects the reduction in value of fixed assets

Amortization is the non-cash expense that reflects the reduction in value of intangible assets

Changes in Working Capital represents the net change in current assets and liabilities.

Capital Expenditures are cash outflows for the acquisition of long-term assets such as property, plant, and equipment.

Alternatively, OCF can also be calculated using the following formula:

Operating Cash Flow = Net Cash From Operating Activities (as reported in the cash flow statement)

It's important to note that different companies may have different ways of calculating OCF and may include or exclude certain items in the calculation. Therefore, it's important to carefully review the company's financial statements and footnotes to understand how OCF is being calculated.

## Price to Operating Cash Flow

Price to Operating Cash Flow (P/OCF) is a financial ratio used to evaluate a company's stock price relative to its operating cash flow. It is calculated by dividing the current market price per share of a stock by the company's operating cash flow per share.

A low P/OCF ratio generally indicates that a stock is undervalued and may be a good investment opportunity, while a high P/OCF ratio may indicate that a stock is overvalued. However, it's important to note that P/OCF ratio should be used in conjunction with other financial ratios and analysis, as well as industry comparables, to make a more informed investment decision.

P/OCF can be used to compare different companies within the same industry and to compare a company's current P/OCF ratio to its historical P/OCF ratio, to see if the company's stock is becoming more or less expensive relative to its operating cash flow.

It's also important to note that P/OCF ratio can be affected by a number of factors such as industry specific, the stage of the business cycle, and the company's own performance, so it's important to consider these factors when interpreting the ratio.

I hope this information was useful for you.

I am using these indicators when selecting the stocks for my portfolio and also to decide when to open or close a trade.

Thanks for reading and feel free to share your thoughts in the comments section.

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