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.
|Liquidity Measurement Ratios||Operating Performance Ratios|
|Profitability Indicator Ratios||Debt Ratio|