Ratio Analysis is a means of financial efficiency of a Management.

  There is no denying the fact that DEFINITION OF 'RATIO ANALYSIS' Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items in financial statements like the balance sheet, income statement and cash flow statement; the ratios of one item – or a combination of items - to another item or combination are then calculated. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. 



The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis. While there are numerous financial ratios, most investors are familiar with a few key ratios, particularly the ones that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, the debt-equity ratio, the dividend payout ratio and the price/earnings (P/E) ratio. For a specific ratio, most companies have values that fall within a certain range. A company whose ratio falls outside the range may be regarded as grossly undervalued or overvalued, depending on the ratio. For example, if the average P/E ratio of all companies in the S&P 500 index is 20, with the majority of companies having a P/E between 15 and 25, a stock with a single-digit P/E would be considered undervalued, while one with a P/E of 50 would be considered overvalued. Of course, this ratio would typically only be considered as a starting point, with further analysis required to identify if these stocks are really as undervalued or overvalued as the P/E ratios suggest. As well, ratios are usually only comparable across companies in the same sector, since an acceptable ratio in one industry may be regarded as too high in another. For example, companies in sectors such as utilities typically have a high debt-equity ratio, but a similar ratio for a technology company may be regarded as unsustainable high. Ratio analysis can provide an early warning of a potential improvement or deterioration in a company’s financial situation or performance. 

In view of the above it is evident  that analysts engage in extensive number-crunching of the financial data in a company’s quarterly financial reports for any such hints. Successful companies generally have solid ratios in all areas, and any hints of weakness in one area may spark a significant sell-off in the stock. Certain ratios are closely scrutinized because of their relevance to a certain sector, as for instance inventory turnover for the retail sector and days sales outstanding (DSOs) for technology companies.

Comments

Post a Comment

Popular posts from this blog

The differential strategy between region and regional integration

Before making an analysis on the specific case of SAARC as a regional integration process, we can highlight the connotation of region and regional integration which is significant in this context. There is no denying the fact that on collective research regions are used in shorter sense having encountered external cooperation among regions in the field of trade, commerce, economics, export and import. But regional integration may be used in broader sense as because integrations is needed in order to manoeuvre the basic cooperation system in relation to the relevant regions in which the respective fields of regions are settled down virtually. Regional integration has become a very common way of co-operation among states in present day international relations. Generally a ‘region’ is an area where some geographically proximate states join together to achieve their common objectives. As I mentioned earlier,  in the  present time more or less every nation-state, strong or ...
Read more

Functions of enzymes

There is no denying the fact that digestive enzymes convert food into small molecules and as such our digestive system breaks down nutrients us consume in food, converting them into small molecules that our cells, tissues and organs use as fuel and for hundreds of metabolic functions. It takes hours to complete this complex process, which results in simple sugars, fatty acids, glycerol and amino acids. After we break food into small pieces by chewing it, specialized enzymes made in different parts of our digestive tract act on it to finalize the process. Amylase Amylase is a digestive enzyme that acts on starch in food, breaking it down into smaller carbohydrate molecules. The enzyme is made in two places. First, salivary glands in your mouth make salivary amylase, which begins the digestive process by breaking down starch when you chew your food, converting it into maltose, a smaller carbohydrate. When starchy foods like rice or potatoes begin to break down in your mouth, you mi...
Read more

Bond energy of Physical chemistry

Image
This article envisages bond enthalpies (bond energies) and looks at some simple calculations involving them. One of the most confusing things about this is the way the words are used. These days, the term "bond enthalpy" is normally used, but we will also find it described as "bond energy" - sometimes in the same article. An even older term is "bond strength". So we can take all these terms as being interchangeable. As we will see below, though, "bond enthalpy" is used in several different ways, and we might need to be careful about this. Explaining the terms Bond dissociation enthalpy and mean bond enthalpy Simple diatomic molecules A diatomic molecule is one that only contains two atoms. They could be the same (for example, Cl 2 ) or different (for example, HCl). The  bond dissociation enthalpy  is the energy needed to break one mole of the bond to give separated atoms - ...
Read more