"Understand Company Accounts With Simple Financial Ratios
that Reveal
Trends in a Company"

 "And Show Comparisons of Companies in Different Sectors"

Introduction

Financial RaiosFinancial Ratios

We can get it that 'Financial Ratios' are as good a way as any for us 'lay people' of ever getting to understand company accounts.

We're not accountants or financial advisors (nor do we play one on TV), so our understanding of accounts is minimal.  But, we did get a basic education at school and we do know what ratios are. 

But ...

... Financial Ratios in isolation will not mean a lot to anyone.

From The Balance Sheet, The Income Statement, or The Cash Flow Statement you could glean probably a few hundred ratios.  Most of them would be quite meaningless to the layman.

However, from a fairly standard set of company accounts, you could probably extract about a couple of dozen meaningful 'Financial Ratios'.

With all of these you could get a pretty good idea about a company's health.

"Where You Can Find Financial Ratios"

'Company accounts can be found on company websites, or if you are using any Stock Trading Platforms (which you will be), either of these will give you access to any company accounts -  if you really want to.

But, you probably don't really need to do that.  Most 'Financial Ratios' are already worked out by analysts.  Maybe not for every single company, but certainly for the type of companies that this website advocates.

However, there is one parameter that you'll not find in any company accounts.  It's a "number" used in several 'Financial Ratios' - and it is, the company share price.

Of course, that's because a company's share price fluctuates all day and every day.

Most information you will ever need regarding 'Financial Ratios' can be obtained from good Stock Trading Software.

Other places you can get information from are:

Bloomberg
Yahoo! Finance
ADVFN
Investopedia

We're never going to be red-hot financial boffins but we reckon it's good to know a little bit about accounts.  As long as they are broken down into bite sized chunks, they are more understandable.

And that's what we reckon ratios do.

So, let's take a look at the various type of 'Financial Ratio'.

"The Different Types of
Financial Ratios"

'Financial Ratios' come in different shapes and sizes. See below for a comprehensive list of the type of ratio available.  Depending on where you look, various ratios may be in a different group. Typically ... 

Some refer to Valuation, for example: 'Price to Book Value'. 

Some about Margins (gross and net) and some about Gearing (interest cover). 

Others are obtained from the 'Balance Sheet', for example: 'Acid Test', and 'Current Ratio'. 

There are some obtained from the Income Statement: e.g. 'Earnings per Share'.

And there are ratios obtained from the 'Cash Flow Statement': e.g.  'Return on Capital Invested'. 

And then there are some lesser referred to types, which we will not have too much say about.

In all, we'd say on this website there are about two dozen ratios. 

How to calculate these ratios from the company accounts is not really an issue. 

Don't worry if you don't know what the heck any of these are just now.  All will be revealed.

And, all the grunt work has been done for you.  So you don't have to do any actual calculations.  Just have an understanding of what they are and what they mean is quite sufficient.

The whole idea being that you have a better understanding of a particular company's accounts.  And are able to compare them to other, similar companies, in a similar sector.

And so therefore, are able to make a more informed opinion about a company.

Here are the different type of Financial Ratio that we shall be using on this website:

  • Efficiency ratiosGearing ratios
  • Investment ratios
  • Margin ratios
  • Profitability ratios
  • Solvency ratios
  • Valuation ratios
  • Volatility and Risk ratios

"What To Look For in Financial Ratios"

'Financial Ratios' make the need for 'number crunching' by us amateurs, unnecessary.

Thank goodness for that!

A ratio is a means of forming an opinion about a company - real or estimated.

However, there is a downside to the study of 'Financial Ratios'.  And that is that you are dealing with historic data.  Therein, lies a note of caution.

For example:

  • How fast is the company growing (or shrinking)?
  • Has the company made a profit over the past 5+ years?
  • What cash (if any) does the company have?
  • Is the amount of cash rising or falling each year?
  • Does the company have any debt?
  • Has the company paid a dividend consistently?
  • Has the dividend cover risen or fallen over the previous 5+ years?

It is not to be concluded that 'Financial Ratios' are the 'be all and end all' of assessing a company's shares. Far from it.  Other factors must be taken into account. But they are a great starting point.

Follow Warren Buffett's advice and only invest in companies that you understand. Look for branding.  Read about Durable Competitive Advantage to give you a more complete picture.

"Books About Financial Ratios"

Ratios Made SimpleRatios Made Simple

Ratios Made Simple by Robert Leach

The book is divided into nine chapters:

1.  Profitability Rations
2.  Investment Ratios
3.  Dividend Cover
4.  Margins
5.  Gearing
6.  Solvency Ratios
                                7.  Efficiency Ratios
                                8.  Policy Rations
                                9.  Volatility

For every ratio discussed the author gives a detailed definition, how it works, and how to use it.  It is all explained in easy-to-understand language.

You can get a copy of this informative book by clicking on the link just below:

Ratios Made Simple
Magic NumbersMagic Numbers

Magic Numbers by Peter Temple

Peter Temple admits that there is no magic formula for making money in stocks but within company financial statements are hidden numbers whereby dividing ne by the other reveals useful information.

This book contains 33 key ratios that private investors need to know before investing their hard-earned. 

Get yourself a copy of this book by clicking the link below:

Magic Numbers: The 33 Key Ratios That Every Investor Should Know
Magic Numbers for Stock InvestorsMagic Numbers for Stock Investors

Magic Numbers For Stock Investors by Peter Temple

This volume builds on the success of the author's previous book: 'Magic Numbers.'

It contains 25 key ratios to help you in your investing success by greater understanding of balance sheets, cash flow statemtns and income statements.

Get Peter Temple's second book on ratios and profit from its contents:

Magic Numbers for Stock Investors: How to Calculate the 25 Key Ratios for Investing Success

Conclusion

Remember that you are dealing with 'historic' data.

Having said that, if a company has shown consistent improvement over the years of improving ratios, there's no reason to believe this kind of performance will sudddenly come to an end.

Don't just analyse ratios.  Look at management of a company, it's brand, its competitive advantage, director dealings.  Form a complete picture. If you are satisfied that the company meets all of your criteria ...

Then, monitor the company.  Put it on your watchlist.  Using Technical Analysis, wait for the right time to buy and take action.

Consistency is what you are looking for with 'Financial Ratios'.  Find a company with 'ticks in all the boxes' and you have found 'The Holy Grail'.

To find more information about ratios go to:

  1. Home
  2. Stock Market Fundamental Analysis
  3. Financial Ratios

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