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There are number of ratios available, it is entirely up to you which one you should use and more important what outcome you desires. We use them according to our need and each ratio method tells different analysis. Normally we divide ratios into four major parts: Liquidity ratios, valuation ratios, profitability ratios and solvency ratios. Each evaluates particular set of information.
Liquidity Ratio:
This ratio particularly shows liquidity of the company; it shows how quickly assets can be transformed into cash. This is very important to know before investing in stocks, whether the company you investing in is capable of paying its creditors or invest more money in assets or can cope with any difficulty or emergency cash need. Most common ratio of liquidity is “Receivables Turnover Ratio”; this ratio tells the debt collection efficiency of the company. Higher the value means higher the liquidity which is considered good and lower values means company is not efficient to collect its debts and chances of fraud is higher.
Valuation Ratios
This ratio analyzes the stocks value of the company, it tells the position of the stock and price of the stock in comparison of different measures. The most common valuation ratio is “Price to Earning Ratio”, its shows comparison between stock price to the returns produce on per-share basis.
Profitability Ratios
This ratio is one of the most crucial ratio while you are taking investment decision because its tell you, how can company generates profit and most common ratio of profitability is “Profit Margin”. Profit margin shows company’s profitability and its margin but in order to assess this right you need to compare it with past results as well.
Solvency Ratios
This ratio also important because its shows; how can company meet its long term debt obligations and invest in future assets. Company with lower debts is more favourable than company which has higher debt obligations. Total debt to asset ratio is most common ratio of solvency ratios.
These are ratios on which you can take investment decision which will be more rational and safe as compare to invest your money without any measures taken.
Article Source: http://www.articlemotron.com
There are many ways to analyze your financial health; some techniques are easy and quick; but some techniques are complicated to apply. The easiest and quickest way to analyze your financial health through financial statements is ratio analysis.
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