Joe Lan, CFA is a former financial analyst for AAII.


Steven Sears from IA posted over 2 years 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 ON posted over 2 years ago:

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

Joe Lan from IL 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 Ithaca, NY posted about 1 year ago:

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

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 NJ 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 IL 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 CA 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 AZ 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.

Nord from California posted 4 months ago:

It would be great if the standard ratios were already preprogramed in Stock Investor Pro.

Ron from Ohio posted 4 months ago:

Hello Joe

great article.

which of the above ratio's would be considered the best, or the number rule of thumb to keep an eye on?

how can we as investors now that the numbers reported by companies are "accurate" .. so many different accounting standards.

Sorry for beginner questions.


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