ratio'd

I’ll be reporting from the LSE this month as Leverage Shares opens the bell for their new ETP offering!

Check them out for when you KNOW a stock is going to push hard for a short period and you want to trade it in your SIPP/ISA.

Why Financial Ratios Are the Secret Weapon Most Investors Miss

Let’s be honest: most people treat investing like a game of chance.

They buy a stock because it’s trending, or because some influencer on Twitter told them it’s a sure thing.

Meanwhile, others are using something a little more nuanced to understand what’s going on…

Financial ratios.

We all know them, and have probably used them in some format, but I’m going to explain in this three part series how to contextualise three of them to use them in a better way…

See, these aren’t just numbers on a screen. They’re the keys to understanding whether a company is overpriced, underpriced, or just plain risky.

In this 3-part series, we’re going to break down three killer ratio insights that most investors never see coming.

By the end, you’ll have a toolkit to spot opportunities and avoid disasters with no maths degree required (it’s literally basic maths anyway, just some people LOVE to overcomplicate for no reason).

Lower Rates, Higher Book Values, and the S&P 500’s Short-Term P/B Relief

Everyone talks about how lower interest rates push up share prices, but there’s another side to this story that almost nobody mentions…

When rates drop, it’s not just your mortgage that gets cheaper - companies can refinance their debt at lower rates too.

This instantly improves their balance sheets and can make their assets more valuable.

The result? Book values start to climb, sometimes faster than share prices.

Do you remember the video I did where I used Perplexity to understand GoDaddy’s share price better?

If you missed it, you can catch it below.

If you skip to this part, you can see where I reference interest rate risk with regards to the stock…

GoDaddy had hedged 79% of their variable rate debt out to 2027!

This right away increased their book value relative to peers, since their liabilities are comparatively lower, which is why their share price did so well over the last year or two…

Now, let’s talk about the S&P 500’s price-to-book (P/B) ratio. T

his ratio is just the share price divided by the book value per share.

Most investors assume that when share prices go up, the P/B ratio will always rise.

But if book value is increasing at the same time, the ratio can actually stay flat or even dip.

That’s short-term relief for the P/B ratio, even as the market is rallying.

Take a look at the SPX’s current P/B…

It is indeed at a multi decade high…

But this is with interest rates at very, very high levels too.

So guess why the market is so excited to have Trump perhaps find a Fed Chair who wants to cut interest rates hard?

You bet - the SPX P/B will dramatically fall, at least in the short term.

This then recalibrates funds and investors who might be more sensitive to value rather than momentum, and they might jump in…

The more participants placated the better!

We can get more micro on this though…

Take banks and real estate companies, for example.

When rates fall, the value of their assets (like loans and properties) can increase, boosting book value. This is especially true for banks, where lower rates can make their loan books more profitable and their balance sheets stronger.

The same goes for real estate investment trusts (REITs), where lower rates can push up property values and make refinancing old debt a breeze.

Here’s the bottom line: lower rates can give the S&P 500’s P/B ratio a breather, even as share prices are rising. Most investors only focus on the share price side of the equation, but the real action is happening on the balance sheet.

If you want to stay ahead of the crowd, keep an eye on book value as well as share price - especially when rates are on the move.

Part two will drop tomorrow.

Make sure you’re tuned in, because we get even more practical with it…

By the way, one of the models we teach for managing your own portfolio in the Academy uses the ratio we’ll be talking about tomorrow.

It’s seriously powerful… when used right.