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Ratio Analysis: Using Financial Ratios

  1. Ratio Analysis: Introduction
  2. Ratio Analysis: Finding The Data
  3. Ratio Analysis: Using Financial Ratios

Now that you’ve got your hands on the financial statements you’ll be working with, it is important to know exactly what to do with this data and how to interpret it. By itself, a ratio is not very useful, but when compared to other companies in the same economic sector, to the broader market, or changes over time – then ratios become a powerful tool to evaluate how attractive a potential investment might be.

As for the ratios you’ll be calculating from these sources, there are dozens that investors and analysts use, but we've chosen 30 important measurements that are the most relevant to the investing process and organized them into six main categories as per the following list. The ratios are presented in a simplified manner to make them easier to understand. These ratios come in a number varieties – some to analyze liquidity some profitability, and some use of debt, for example – but by the end you will understand the basic premise and reasons for fundamental analysis.

The Ratios:

Liquidity Measurement Ratios

Return On Equity 

Operating Performance Ratios

Current Ratio 

Return On Capital Employed 

Fixed-Asset Turnover 

Quick Ratio 

Debt Ratios

Sales/Revenue Per Employee 

Cash Ratio 

Overview Of Debt 

Operating Cycle 

Cash Conversion Cycle

Debt-Equity Ratio 

Cash Flow Indicator Ratios

Profitability Indicator Ratios Debt Ratio

Operating Cash Flow/Sales Ratio 

Profit Margin Analysis 

Capitalization Ratio 

Free Cash Flow/Operating Cash Ratio 

Effective Tax Rate 

Interest Coverage Ratio 

Cash Flow Coverage Ratio 

Return On Assets 

Cash Flow To Debt Ratio 

Dividend Payout Ratio