Ratio analysis forms the cornerstone of fundamental stock analysis. There are a variety of ratios that analysts use to judge the attractiveness of a company as an investment. Ratios can help evaluate a company’s liquidity, profitability, debt levels, cash flow, valuation, and operating performance.
Operating performance ratios look at how well a company turns its assets into revenue as well as the efficiency by which it converts merchandise into cash. When using these ratios, it is important to consider both short-term assets, such as inventory and accounts receivables, and long-term assets such as property, plant and equipment. In general, the better these ratios, the better the company is and the better it is for shareholders.
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