It is a very common dilemma for stock buyers who are not traders. They want to invest in the best penny stocks, but do not know the process involved in it.  They are in a dilemma, whether to trust their friendly neighborhood broker or their professional financial planner. Some of them also refer to reports of market analysts to take their penny stock purchasing decisions. But at the end of the day, when it comes to taking a decision to buy a particular penny stock, they are all at sea.  But the question to be asked is why are they depending upon others when they can do the selection of the best penny stocks themselves without referring to anyone’s opinions? You may well ask, how can this be done. To help you understand the parameters of selecting the best penny stocks, yourself, you need to understand the story of the eight key ratios which bring out the inherent value of the best penny stock. These ratios help you in knowing the inherent strength of penny stocks that you have chosen to buy at a particular time.  When you conduct an analysis of the best penny stocks based on these 8 key ratios, and then you will be successful in the selection of the best penny stocks. The eight key ratios are as under:

• Ploughback/Reserves
• Book Value Per Share
• Earnings Per Share
• Price Earnings Ratio
• Dividend and Yield
• Return On Capital Employed
• Return On Net Worth
• PEG Ratio

I will touch upon only a few of the above in this discussion.

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.

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