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16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses

by Joe Lan, CFA

In the previous installments of AAII’s Financial Statement Analysis series, I discussed the three most commonly used financial statements—the income statement, balance sheet and cash flow statement.

In this installment of the series, I take an in-depth look at the most commonly used financial ratios. Click here for a downloadable spreadsheet that automatically calculates these ratios using financial statement inputs that you provide. Click here for detailed explanations on creating the ratios for ...To continue reading this article you must be registered with AAII.

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Joe Lan, CFA is a financial analyst at AAII.


Discussion

Steven Sears from Iowa posted about 1 year ago:

Another great article! It is good to underscore the vast differences between industries. I look forward to receiving the hard copy to keep on my desk. Thank You!


Thomas Dean from posted about 1 year ago:

This article omits value ratios: Price to Earnings, Price to Cash Flow, Price to Book, Price to Sales.


Joe Lan from Illinois posted about 1 year ago:

We have yet to discuss valuation ratios and ROE in detail and will likely do that in a future article.


Doug from New York posted about 1 year ago:

The Debt-to-Equity ratio section doesn't seem right to me:
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Debt-to-equity ratio

The debt-to-equity ratio measures the amount of debt capital a firm uses compared to the amount of equity capital it uses. A ratio of 1.00x indicates that the firm uses the same amount of debt as equity and means that creditors have claim to all assets, leaving nothing for shareholders in the event of a theoretical liquidation.
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Given that Equity = Assets - Liabilities, I would think that a debt-to-ASSETS ratio of 1.00x would be the case where creditors have claim to all assets, leaving nothing for shareholders in a liquidation.

A debt-to-equity ratio of 1.00x implies (by the above equation) that Assets are twice liabilities; so there IS something left for shareholders in the event of a liquidation.

I think the debt-to-equity ratio is useful as a sensitive index of LEVERAGE, given that additional debt increases assets in the same amount as liabilities, but leaves equity unchanged.


Raj from New Jersey posted about 1 year ago:

Agree with Doug. As long as the Assets > Liabilities, wont there be something (theoretically) left over for shareholders?

In practice, there is cost associated with liquidation and the amount leftover (Assets - Liabilities) will have to be significant enough to repay the shareholders.

Great article as the previous four and look forward to more!


Gerrie Griffin from Illinois posted about 1 year ago:

Great article. Gave me a clear understanding of what basic ratios measure and how to calculate them. Thanks!


Alex from California posted about 1 year ago:

Would you consider some ratios for evaluating
Dividends & the companies ability to continue making them(Common and/or Preferred) in various industries (MLP'S, REITS,Utilities, Financial,
all Others)


Doug Dudley from Arizona posted about 1 year ago:

Thanks, Doug. I am just catching up and the comment about "leaving nothing for shareholders in the event of a theoretical liquidation" would have bugged me, too.

I am also enjoying these articles. Much more interesting as a retired investor than a working accountant.


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