Financial ratios, fundamental analysis’ alphabet, are key figures that give us at a glance the big picture of a company’s performance based on its balance sheet items. Fundamental analysis, and more particularly, the proper analysis of financial ratios can become a significant determinant of superior stock trading performance. Stock traders and investment analysts use financial ratios extensively to pick those stock that are likely to outperform the market or the benchmark.
Financial ratios are for a company’s balance sheet what a nutrition facts table is for the ingredients list of your favorite soda can. It is a quick and easy way to understand the performance of a company at a particular time, without knowing the exact meaning of all the information listed on the balance sheet, in the same way that you do not need to know what high fructose corn syrup is to know the percentage of calories in your favorite soda can.
Since there are more than 200 different financial ratios, other more and other less important, it is imperative to categorize them in a similar fashion that will be easily memorized and efficiently used by investors. There are many different categorization approaches, but the most popular one for stock trading is to team up financial ratios that refer to the same subcategory of the balance sheet.
Financial ratios can then be divided, based on their relevance to the balance sheet, to liquidity ratios, leverage (debt) ratios, operating ratios, profitability ratios, management effectiveness ratios, and solvency ratios.
Another way to categorize financial ratios is based on the organization of the firm. Financial ratios can be categorized to growth ratios, price ratios, profitability ratios, investment ratios, management ratios and efficiency (activity) ratios.
Typically, financial ratios are available on an annual basis, but for most large listed companies that announce their key balance sheet items more frequently, financial ratios are quarterly obtainable. This is very important for stock traders, investors, and portfolio managers who rebalance their portfolios more frequently than a yearly basis.
A very important aspect about financial ratios is that, at the end of the day, they are nothing more than plain numbers and percentages. Knowing solely, for example, that Microsoft’s net profit margin (net income/net sales) sometime in the past was 33.01%, has the same gravity as knowing that, some years ago, Bill Gates’ weight on the moon was 12 kilos. It does not provide any valuable information at all.
Thus, the importance and usage of financial ratios is relative. Relative to the results of similar companies at that particular time, relative to the sector’s average performance at that particular time, relative to the company’s historical evolution of these ratios over time and, relative to the goals the company has set to achieve and the particularities the company is facing at that particular time.
Financial ratios are a simple but essential start-up kit that the fundamental analysis’ boot camp offers in the stock trading war, one that every investor should master. But, don’t forget that everyone has access to the same level of information concerning financial ratios. How to qualitatively interpret them will make the difference in our everyday demanding investment decisions and may assist us separating from the pack.
StockTradingCollege.com, Stock Trading and Investing for Beginners
Financial ratios are for a company’s balance sheet what a nutrition facts table is for the ingredients list of your favorite soda can. It is a quick and easy way to understand the performance of a company at a particular time, without knowing the exact meaning of all the information listed on the balance sheet, in the same way that you do not need to know what high fructose corn syrup is to know the percentage of calories in your favorite soda can.
Since there are more than 200 different financial ratios, other more and other less important, it is imperative to categorize them in a similar fashion that will be easily memorized and efficiently used by investors. There are many different categorization approaches, but the most popular one for stock trading is to team up financial ratios that refer to the same subcategory of the balance sheet.
Financial ratios can then be divided, based on their relevance to the balance sheet, to liquidity ratios, leverage (debt) ratios, operating ratios, profitability ratios, management effectiveness ratios, and solvency ratios.
Another way to categorize financial ratios is based on the organization of the firm. Financial ratios can be categorized to growth ratios, price ratios, profitability ratios, investment ratios, management ratios and efficiency (activity) ratios.
Typically, financial ratios are available on an annual basis, but for most large listed companies that announce their key balance sheet items more frequently, financial ratios are quarterly obtainable. This is very important for stock traders, investors, and portfolio managers who rebalance their portfolios more frequently than a yearly basis.
A very important aspect about financial ratios is that, at the end of the day, they are nothing more than plain numbers and percentages. Knowing solely, for example, that Microsoft’s net profit margin (net income/net sales) sometime in the past was 33.01%, has the same gravity as knowing that, some years ago, Bill Gates’ weight on the moon was 12 kilos. It does not provide any valuable information at all.
Thus, the importance and usage of financial ratios is relative. Relative to the results of similar companies at that particular time, relative to the sector’s average performance at that particular time, relative to the company’s historical evolution of these ratios over time and, relative to the goals the company has set to achieve and the particularities the company is facing at that particular time.
Financial ratios are a simple but essential start-up kit that the fundamental analysis’ boot camp offers in the stock trading war, one that every investor should master. But, don’t forget that everyone has access to the same level of information concerning financial ratios. How to qualitatively interpret them will make the difference in our everyday demanding investment decisions and may assist us separating from the pack.
StockTradingCollege.com, Stock Trading and Investing for Beginners