8 key ratios to spot the right stocks

Book value per share:

This ratio shows the worth of each share of a company as per the company's accounting books. It is calculated as: Book Value per share = Shareholders' funds / Total quantity of equity shares issued
Shareholders' funds can be computed by subtracting the total liabilities (money owed to creditors) of the company from its total assets. It can also be calculated by adding the equity capital to the company's reserves. Book value is an old record that uses the original purchase prices of the assets. However it doesn't show the present market price of the company's assets. As a result, this ratio has a restricted use when it comes to estimating the market price of the shares, but can give you an estimate of the minimum price of the company's shares. It will also help you judge if the share price is overpriced or under-priced.
Earnings per share (EPS):

One of the most popular investment ratios, it can be computed as:
Earnings per Share (EPS) = Profit Post Tax / Total quantity of equity shares issued
This ratio computes the company's earnings on a per share basis. E.g. you own 100 shares of ABC Co., each having a face value of Rs 10. Assume the earnings per share is Rs 10 and the dividend declared is 30 per cent, or Rs 3 per share. This implies that on every share of ABC Co, you earn Rs. 6 each year, but you actually get Rs 3 via dividend. The balance of Rs 4 per share goes into the plough back (retained earnings). Had you purchased these shares at par, it implies a return of 60 per cent. This example shows that instead of looking at the dividends received from to company as the base of investment returns, always look at earnings per share, as it is the actual indicator of the returns earned by your shares.
Price earnings ratio (P/E):

This ratio highlights the connection between the market price of a share and its EPS.
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
It shows the degree to which earnings of a share are protected by its price. E.g. if the P/E is 40, it means the share price is 40 times its earnings. So if the company's EPS is constant, it will need about 40 years to make up for the purchase price of the share, after taking into account the dividends and the capital appreciation. Hence low P/E means you will recover your money quickly. P/E ratio shows what the market thinks about the earnings potential and future business forecast of a company. Companies with high P/E ratios are the darlings of the investors and thus enjoy a higher market rating. In order to use the P/E ratio properly, take into account the future earnings and growth projections of the company. If the current P/E ratio is low, as against the future prospects of a company, then the shares make an attractive investment option. But if the company is saddled with losses and falling sales, stay away from it, despite the low P/E ratio.
Dividend:

Dividend is the portion of the profit that is distributed amongst shareholders. Companies offering high dividends, normally don't have much of growth to talk about. This is because the plough back required to finance future development is insufficient. Similarly, those companies in high growth sector don't give any dividend. Instead here they give sharp capital appreciation, which ultimately will lead to higher dividends. So it makes much more sense to invest for capital appreciation instead of dividends. Rather it makes more sense to invest for yield, which is nothing but the association between the dividends and the market price of the shares.
Yield:

(dividend yield) can be calculated as:

Yield = (Dividend per share / market price of a share) x 100
Yield shows the returns in percentage that you can expect via dividends earned by your investment at the current market price. It is more useful than simply focusing on the dividends.
Return on capital employed (ROCE):

ROCE is the ratio that is calculated as:
ROCE: Operating profit / capital employed (net value + debt)
To get operating profit, add old taxes paid, depreciation, special one-off expenses, and special one-off income and miscellaneous income to get the net profit. The operating profit is a far better indicator of the profits earned by the company instead of the net profit. Hence this ratio is the better indicator of the general performance of the company and the company's operational efficiency. It is one of the most useful ratio that lets you compare amongst the companies.
Return on net worth (RONW):

RONW is calculated as RONW = Net Profit / Net Worth
This ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective measure to get a general overview of the profitability of the company's business operations, RONW lets you gauge the returns you can earn on your investment. When used along with ROCE, you get an overview of the company's competence, financial standing and its capacity to generate returns on shareholders' finances and capital employed.
PEG ratio:

PEG is an essential and extensively used ratio for calculating the inbuilt worth of a share. It helps you decide whether the share is under-priced, totally priced or overpriced. To derive the ratio, you have to associate the P/E ratio with the expected growth rate of the company. It assumes that higher the growth rate of the company, higher the P/E ratio of the company's shares. Vice versa also holds true.
PEG = P/E / expected growth rate of the EPS of the company
In general, a PEG lesser than 0.5 is a lucrative investment opportunity. However if the PEG exceeds 1.5, it is time to sell. These are some of the most critical ratios that must be considered when purchasing a share. Extensive reading of the financial performance of the company in newspapers and magazines will help you get all the relevant information to get the correct decision

The 10 biggest falls in Sensex history

Jan 21, 2008: The Sensex saw its highest ever loss of 1,408 points at the end of the session on Monday. The Sensex recovered to close at 17,605.40 after it tumbled to the day's low of 16,963.96, on high volatility as investors panicked following weak global cues amid fears of the US recession.
Jan 22, 2008: The Sensex saw its biggest intra-day fall on Tuesday when it hit a low of 15,332, down 2,273 points. However, it recovered losses and closed at a loss of 875 points at 16,730. The Nifty closed at 4,899 at a loss of 310 points. Trading was suspended for one hour at the Bombay Stock Exchange after the benchmark Sensex crashed to a low of 15,576.30 within minutes of opening, crossing the circuit limit of 10 per cent.
May 18, 2006: The Sensex registered a fall of 826 points (6.76 per cent) to close at 11,391, following heavy selling by FIIs, retail investors and a weakness in global markets. The Nifty crashed by 496.50 points (8.70%) points to close at 5,208.80 points.

December 17, 2007: A heavy bout of selling in the late noon deals saw the index plunge to a low of 19,177 - down 856 points from the day's open. The Sensex finally ended with a huge loss of 769 points (3.8%) at 19,261. The NSE Nifty ended at 5,777, down 271 points.
October 18, 2007: Profit-taking in noon trades saw the index pare gains and slip into negative zone. The intensity of selling increased towards the closing bell, and the index tumbled all the way to a low of 17,771 - down 1,428 points from the day's high. The Sensex finally ended with a hefty loss of 717 points (3.8%) at 17,998. The Nifty lost 208 points to close at 5,351.
January 18, 2008: Unabated selling in the last one hour of trade saw the index tumble to a low of 18,930 - down 786 points from the day's high. The Sensex finally ended with a hefty loss of 687 points (3.5%) at 19,014. The index thus shed 8.7% (1,813 points) during the week. The NSE Nifty plunged 3.5% (208 points) to 5,705.
November 21, 2007: Mirroring weakness in other Asian markets, the Sensex saw relentless selling. The index tumbled to a low of 18,515 - down 766 points from the previous close. The Sensex finally ended with a loss of 678 points at 18,603. The Nifty lost 220 points to close at 5,561.

August 16, 2007: The Sensex, after languishing over 500 points lower for most of the trading sesion, slipped again towards the close to a low of 14,345. The index finally ended with a hefty loss of 643 points at 14,358.
April 02, 2007: The Sensex opened with a huge negative gap of 260 points at 12,812 following the Reserve Bank of India decision to hike the cash reserve ratio and repo rate. Unabated selling, mainly in auto and banking stocks, saw the index drift to lower levels as the day progressed. The index tumbled to a low of 12,426 before finally settling with a hefty loss of 617 points (4.7%) at 12,455.

August 01, 2007: The Sensex opened with a negative gap of 207 points at 15,344 amid weak trends in the global market and slipped deeper into the red. Unabated selling across-the-board saw the index tumble to a low of 14,911. The Sensex finally ended with a hefty loss of 615 points at 14,936. The NSE Nifty ended at 4,346, down 183 points. This is the third biggest loss in absolute terms for the index.

BSE SENSEX - A HISTORY

BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index of 30 stocks started in April, 1984. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the BSE. These companies account for around one-fifth of the market capitalization of the BSE. The base value of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79. At regular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions. The index is calculated based on a free-float capitalization method; a variation of the market cap method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders. The index has increased by over ten times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the BSE Sensex works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation.

Sensex milestones
Here is a timeline on the rise and rise of the Sensex through Indian stock market history.
1000 - July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.
2000 - January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh.
3000 - February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by Manmohan Singh.
4000 - March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.
5000 - October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as the BJP-led coalition won the majority in the 13th Lok Sabha election.
6000 - February 11, 2000 - On February 11, 2000, the information technology boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.
7000 - June 21, 2005 - On June 20, 2005, the news of the settlement between the Ambani Brothers boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time.
8000 - September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index – the Sensex - crossed the 8000 level following brisk buying by foreign and domestic funds in early trading.
9000 - December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors.
10,000 - February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10,000-mark on February 7, 2006.
11,000 - March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points.
12,000 - April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first time.
13,000 - October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the first time. It touched a peak of 13,039.36 and finally closed at 13,024.26.
14,000 - December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000.
15,000 - July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 mark.
16,000 - September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000 mark.
17,000 - September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000 mark for the first time.
18,000 - October 9, 2007 - The Sensex on October 09, 2007 crossed the 18,000 mark for the first time.
19,000 - October 15, 2007 - The Sensex on October 15, 2007 crossed the 19,000 mark for the first time.
20,000 - October 29, 2007 - The Sensex on October 29, 2007 crossed the 20,000 mark for the first time.
21,000 - Jan 08, 2008 - The Sensex on January 08, 2008 touched all time peak of 21078 before closing at 20873.