MASTERCLASS Investment – Ratio Analysis – What it is, where to get the data and how to use the ratios

MASTERCLASS Investment – Ratio Analysis – What it is, where to get the data and how to use the ratios

Investment – Ratio Analysis – What it is, where to get the data and how to use the ratios

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:

  • Company Websites Most public companies have a website or investor relations department. For the most current half year (Aust) quarterly (USA) or annual report you find them on their websites and also look for their investor relations sections.
  • Australian Stock Exchange (ASX)(Aust)Have their offices in major cities Melb, Syd etc, and also their website http://asx.com.au/ there are Free member offers announcements, education, company search, market statistics and more. The company search is also invaluable – http://www.asx.com.au/research/company-research.htm
  • Securities and Exchange Commission (SEC) (USA) – The information posted in the electronic gathering, analysis and retrieval (EDGAR) database includes the annual report (known as the 10-K), quarterly report (10-Q), and a myriad of other forms that contain every type of financial data.
  • Yahoo! Finance – A great resource for many individual investors, Yahoo! Finance is great for financial news, and lays out ratios and performance data for individual companies.
  • Trading room in Aust http://www.tradingroom.com.au/apps/index.ac  – A great site for company info, charts; some basic analysis as well as market info and current intra-day news.

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)

Debt to Equity

Current Ratio – one sign of business health

Price to earnings

ROE – Return on Equity – also see Why avoid companies with low ROE

ROA – Return on Assets

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.

If you have questions, call 0407 361 596

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