Financial ratios and shares
How does it all work?
When reading newspapers and most financial reports about a company, journalists use the terminology that we'll be discussing in this section. Financial ratio analysis makes use of historical financial data of a company to determine whether it is worthwhile to invest in its shares.
Ratio analysis uses different numbers from the balance sheet, income statement, and cash flow statement to calculate ratios that can be compared to previous years, or other companies in similar industries. There are different types of ratios that give different types of information.
- Investor or shareholder ratios
These ratios look at how the company is performing from a shareholder perspective, as long term investors buy shares of a company expecting future profits. The common ratios used by investors are discussed in detail under Investor ratios.
- Profitability ratios
These ratios look at how well the company is performing taking profitability and return on assets into account.
- Liquidity ratios
These ratios look at whether the company has enough cash to repay debt.
- Activity ratios
These ratios look at how the company has utilised its assets.
- Financing ratios
These ratios look at how the company is financed,its debt and its equity.