Ratios show the relationships between certain components of the two financial statements we have just reviewed. The ratio can be a powerful tool for you to use to understand the underlying reasons the financial structure, condition and trends of your customer. When you analyse ratios, however, you must relate your customer's ratios historical performance to the ratios of their competitors or their industry. Ratios are always "compared to what" and should never be taken at face value on a stand alone basis.
Typically you will find ratios discussed in the financial highlights, historical summary of financial data and the management discussion and analysis sections. The ratios that we will be looking at to help you to identify trends and potential business issues within your accounts will be:
- Market Ratios - the market's anticipation of the stock's performance
- Operating Ratios - measuring how profitable the company is based on how well it uses its resourses
- Efficiency Ratios - measuring the speed/activity with which the company can turn its assets into cash
|
