Question

Which category of ratios are the most popular for investors? Explain why?

Answer 1

Profitability ratio have always been most popular among investor for a long period of time because it is reflecting the ability of the company in order to generate the profit and investors are often trying to formulate it in price to earning ratio which is the most common ratio which is used by the investors in the investors fraternity which is used to derive the valuation of the company in order to invest in the company by comparing with the peers using relative valuation approach.

Profitability ratios are reflecting the ability of the company to generate profit for a longer period of time and it is also reflecting the easier comparability of various profit making companies and separate it from the loss making companies, So, investors are often selecting companies which are making profits and which are trading at a lower value in the market so price to earning approach which is a part of profitability approach and relative valuation method is used most by the investor in order to derive the value of the company and invest in the market so it can be said that price to earning ratio is the most used ratio and it can be categorised under the profitability ratio of the company.