8 Things to Look out for When Investing in a Business - The End

1. Ratios: P/E and D/E
   The P/E and D/E ratios are two of the most fundamental metrics you should consider before investing in any stock.

A P/E is the company's price-to-earnings ratio. This is the ratio of the company's current stock price to its total profit (or "earnings") per outstanding share. So, for example, if a company's stock sold for $30 and it had a profit of $2 per share, its P/E ratio would be 15x.

The P/E ratio tells you, in a nutshell, how much investors are willing to spend to access each dollar of a company's profits. In our example above, it means investors will spend $15 for every $1 in profit the company has. The higher this ratio, the more confident investors are about the company. In general a ratio of 14 - 20 is about right for most stocks most of the time. A lower ratio could indicate that investors think this company is in trouble, while a higher one could indicate that the stock has gotten overvalued.

The D/E ratio is a company's debt-to-equity ratio. This is the level of how much debt the company has compared to its total assets. To calculate the D/E ratio, you divide the company's total liabilities by its total assets. For example, a company with $100,000 in liabilities and $1 million in cash and other assets would have a D/E ratio of 0.1.

This number can indicate how potentially risky an investment is overall. A lower D/E ratio is generally considered a safe bet because it means that the company is flush compared with its debts. A high one means that the company has a lot of debt relative to its ability to pay, while a D/E ratio above 1 means that it has more liabilities than it has assets. High D/E ratios (generally anything above a 0.3 - 0.5) might mean a company poised for growth, having borrowed heavily for expansion, but more often they indicate a high-risk investment.