In this Masterclass explain Ratio Analysis of companies/stocks, including what it is, what data and where to get what we need and how to use the ratios.
What is Ratio Analysis?
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm’s financial performance in several key areas by using ratios (simply, one number divided by another). The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios.
Ratio analysis involves comparing different numbers from the balance sheet, income statement / profit and loss and cash flow statement. It’s most effective when comparing these numbers against previous years, other companies and the industry while bearing in mind the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, which may indicate how it might perform in the future.
As an example, current assets alone don’t tell us a whole lot, but when we divide them with current liabilities we get the Current Ratio – an indication of whether the company has enough money to cover short-term debts.
In this class, we’ll show you how to use ratio analysis to analyse financial reports and get an insight into companies by comparing these ratios against previous years, other companies and industry averages to see how they can tell you a lot about where a company might be headed. Evaluating a company is no easy task, so let us help shed some light on how it can be done and, ultimately, help you to make more informed choices as an investor.
Where is the data?
There are several different places you can find the latest financial figures for a particular company. Finding financial reports is easier than ever now, with the Internet, and here are some sources:
How to create and use the ratios
There are 70-90 or more possible ratios. A ratio is simply taking one number from a financial statement and dividing another number into it. Quite simple, no complicated maths. Over time a core dozen or so ratios have been considered essential and some of these are – (click names to learn about them)
Current Ratio – one sign of business health
Want to learn the core issues of Ratios and share investing?
Our slides SMSF & Shares Overview gives a quick session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.