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Author: William Wordworthy

Thanks to the recession in the USA, created by the body blow that was dealt to the real estate industry and the home loan industry in the country, many traders in the stock market are now scared stiff to invest in the stock market. During the peak period, they had put all their money on stocks that they expected to gain in the near future, but due to the recession, they had to bite the dust. Some people may still smart from their losses even for one year after the recession leaves the USA. This is because their exposure to stocks which suffered heavily was more, and this led to their trust in penny stocks reaching a new low. Traders who previously swore by small and mid-caps on the NASDAQ, now advise against putting your money in them. The reason for this is not far to seek. All small and mid-cap stocks have been beaten black and blue by the vagaries of the recession and a direct offshoot of this is the loss of trust of the common people in trading of penny stocks. But when you buy penny stocks, there are certain key indicators that one has to look at before putting their money in it.

There are certain key ratios that have been devised in order to asses the real value of a particular penny stock. But not everybody knows the nitty gritty of all this and therefore my attempt in this article is to simplify investing in penny stocks. When you are investing in the best penny stocks then you need to take a look at the following key values which give you a fair indication of the present inherent value of a penny stock and its future potential. These indicators are: Ploushback/Reserves, Book Value Per Share, Earnings Per Share, Price Earnings Ratio, Divident and Yield, Return on Capital Employed, Return on Net Worth, PEG ratio.

Book Value Per Share: This ratio shows the worth of each penny stock 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.

Earnings per Share: 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 Price Earnings Ratio: This ratio highlights the connection between the market price of a penny stock and its EPS.

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share Return On Capital Employed: ROCE is the ratio that is calculated as: ROCE: Operating profit / capital employed (net value + debt) Return on Net Worth: RONW is calculated as RONW = Net Profit / Net Worth PEG Ratio: PEG is an essential and extensively used ratio for calculating the inbuilt worth of a penny stock. It helps you decide whether the penny stock is under-priced, totally priced or overpriced.