Ratio Analysis: Using Financial Ratios

Now that you’ve got your hands on the financial statements you’ll be working with, it is important to know exactly what to do with this data and how to interpret it. By itself, a ratio is not very useful, but when compared to other companies in the same economic sector, to the broader market, or changes over time – then ratios become a powerful tool to evaluate how attractive a potential investment might be.

As for the ratios you’ll be calculating from these sources, there are dozens that investors and analysts use, but we've chosen 30 important measurements that are the most relevant to the investing process and organized them into six main categories as per the following list. The ratios are presented in a simplified manner to make them easier to understand. These ratios come in a number varieties – some to analyze liquidity some profitability, and some use of debt, for example – but by the end you will understand the basic premise and reasons for fundamental analysis.

The Ratios:

Liquidity Measurement Ratios	Return On Equity	Operating Performance Ratios
Current Ratio	Return On Capital Employed	Fixed-Asset Turnover
Quick Ratio	Debt Ratios	Sales/Revenue Per Employee
Cash Ratio	Overview Of Debt	Operating Cycle
Cash Conversion Cycle	Debt-Equity Ratio	Cash Flow Indicator Ratios
Profitability Indicator Ratios	Debt Ratio	Operating Cash Flow/Sales Ratio
Profit Margin Analysis	Capitalization Ratio	Free Cash Flow/Operating Cash Ratio
Effective Tax Rate	Interest Coverage Ratio	Cash Flow Coverage Ratio
Return On Assets	Cash Flow To Debt Ratio	Dividend Payout Ratio

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