Let’s talk about penny stock ratios. Which ones actually matter (and which ones are total traps)?
# Hi Everyone,
You're looking at a stock that's trading for $40, and the message boards are buzzing that it's the next big thing, and you start working with the typical valuation ratios such as the P/E ratio. Big mistake.
There are not many penny stocks with any earnings. The normal P/E ratio has no meaning here at all - the "E" value is negative.
Things are very different with the micro-caps. You're not purchasing proven blue chips, you're buying risky and speculative vehicles. One thing you can never do if you'd like to survive is to look at the numbers that really do indicate that a company is not going to go completely bankrupt next month.
These are the ratios that are worth considering.(don't be hesitate,comment sections is yours,put whatever you want to know about these...)
# 1 Cash Burn Rate & Runway (The Lifeline)
Yahoo Finance might have a nice, neat ratio, but there is no more important math you will ever need to do. Compare their cash, with their negative cash flow from operations.,So a company with $2 million in cash but they're spending $1 million a quarter? They have only two chances of survival.
What this means: If a penny stock runs out of money, it's not the end of the world! They dilute. They sell more stocks or they purchase bad debt. Then it's retail shareholder busting. You would like to have a minimum of 12 to 18 months of runway.
# 2. The Current Ratio
This one is simple. Current Assets / Current Liabilities. It indicates whether the business is able to pay back its debts over the coming year.Below 1.0: Dangerous. In the short term they have more to pay than they do to pay.Above 1.5 or 2.0: Much safer. It provides the business some room to follow its business plan without diluting the stock to keep the lights on.
# 3. Price-to-Sales Ratio (P/S)
Typically, earnings will be little to none, so you should focus on revenue. P/S ratio is the total company's market value divided by the past 12 months' revenue.
It allows you to make apples-to-apples comparisons within a sector. If one penny stock trades at a P/S of 2 and another stock in the same niche trades at a P/S of 30, you should ask yourself some questions before you invest in the latter, especially if it's a stock that is extremely overvalued.
# 4. Debt-to-Equity (D/E)
A number of micro-caps are completely under water. A highly leveraged business structure means that the lender is actually the one who owns the business, not the shareholders. Seek out companies that have minimal debts in comparison to equity. Penny stocks have a far better opportunity at turning around for good when their balance sheet is clean.
# The Reality Check...!!!
Be sure to always read ratios in context. A penny stock can have a lovely current ratio now and if no one wanted to buy or sell their stocks? It doesn't matter.
These balance sheet ratios should always be used in conjunction with volume. A healthy financial situation is essential in order to avoid getting into a bankruptcy situation, but you need trading volume to be able to sell your stock at an appropriate time.