Introduction to financial ratios

Financial ratios are used to evaluate a company- Its Financial Strength, Management effectiveness, Efficiency and Profitability.

Ratios look at the fundamental financial aspects of the company. It gives you an idea about –

  • The current financial position of the company
  • where the company ranks among its peers and if it is properly priced by the market as reflected in its stock’s price
  • Overall, it helps you to decide if a particular company is worth getting involved with.

Since, ratios look at companies from the fundamental level; ratio analysis is also called fundamental analysis. Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The ultimate goal is to determine the current worth and, more importantly, how the market values the stock.

There are at least 12 financial ratios you should understand to evaluate a company.

This article focuses on the key tools of fundamental analysis and what they tell you. Even if you don’t plan to do in-depth fundamental analysis yourself, it will help you follow stocks more closely if you understand the key ratios and terms.

It is enough that you understand all these ratios, its meaning, components and relevance. Most of the ratios need not be computed since these form part of the financial statements. All these ratios are available in the internet from various financial websites and magazines.

My favorite site for picking up ratios

To get all the non financial and financial datas of Indian companies, my favorite sites are -

1. Moneycontrol.com

2. In.Reuters.com

List of key ratios :

  1. Earnings per share or EPS
  2. Price to Earnings Ratio – P/E
  3. Market capitalization
  4. Price to Sales – P/S
  5. Price to Book – P/B
  6. Dividend Payout Ratio
  7. Dividend Yield
  8. Book value
  9. Return on Equity
  10. Interest coverage ratio
  11. Current and quick ratios
  12. PEG ratio

Till my next post on ratios …

……have a nice time..!!

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2 Responses to “Introduction to financial ratios”

Srinivas Raju

June 4, 2011 at 11:57 am

Hi,
The website you have mentioned as your favourite for calculating financial ratios is not working. Can you suggest any other website(s) to get these ratios.

Thanks for your articles. They are very informative.

Regards,
Srinivas Raju.

J Victor

June 6, 2011 at 7:42 am

Thankyou. we will check on that. may be there’s some technical problem .

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