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All trading basics

Ratio Analysis

Introduction

Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future.

For example current assets alone don't tell us a whole lot, but when we divide them by current liabilities we are able to determine whether the company has enough money to cover short term debts.

Before we delve into the different ratios and how they work, let's briefly discuss where you can find the data for each ratio.