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 Stock Investor Pro users.
In this article
Share this article
Facebook
Twitter
E-mail
SeekingAlpha
Stumbleupon
Delicious
LinkedIn
Ratio Analysis
Over the years, investors and analysts have developed numerous analytical tools, concepts and techniques to compare the relative strengths and weaknesses of companies. These tools, concepts and techniques form the basis of fundamental analysis.
Ratio analysis is a tool that was developed to perform quantitative analysis on numbers found on financial statements. Ratios help link the three financial statements together and offer figures that are comparable between companies and across industries and sectors. Ratio analysis is one of the most widely used fundamental analysis techniques.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
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!
posted 6 months ago by Steven Sears from Iowa
This article omits value ratios: Price to Earnings, Price to Cash Flow, Price to Book, Price to Sales.
posted 6 months ago by Thomas Dean from
We have yet to discuss valuation ratios and ROE in detail and will likely do that in a future article.
posted 6 months ago by Joe Lan from Illinois
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.
posted 5 months ago by Doug from New York
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!
posted 5 months ago by Raj from New Jersey
Great article. Gave me a clear understanding of what basic ratios measure and how to calculate them. Thanks!
posted 5 months ago by Gerrie Griffin from Illinois
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)
posted 2 months ago by Alex from California
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.
posted 2 months ago by Doug Dudley from Arizona
