Financial Ratios: Introduction

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Fundamental analysis revolves around the understanding of financial statements of a company before investing.  While financial statements do help in understanding of financial health of a company; but while making peer to peer comparison or comparison over a number of years might be difficult by just looking at absolute numbers.

Financial Ratios helps an analyst to compare different companies within industry or companies working across globe. Good understanding of financial ratios helps to not only improve the predictive capability of an analyst but also improve the efficiency on time required.

In this series we would cover Key Financial ratios, which would help to make better investment decisions. We will also try to compare few key ratios from each of the below mentioned categories across banks or other financial institutions to help you better understand financial ratio.

Primarily we would divide financial ratios into 4 categories.

Liquidity Ratios: Liquidity ratios refers to a class of financial ratios which helps to analyze a firm`s ability to meet short term liabilities.

Leverage Ratios: Leverage ratios also known as solvency ratios give indication of how a company has financed its long term assets or business activities. Leverage ratio focus on the long-term solvency of the company with regards to how much capital comes in the form of debt or assessing the ability of the company to meet its financial obligation.

Profitability Ratios: Profitability ratios try to explain the relation between profits and investment activities of a firm.

Operating Ratios: Operating ratios involves the analysis of operating efficiency of a company’s.

Valuation Ratios: Valuation ratios give information regarding performance of a company in capital market.  Valuation ratios put that insight into the context of a company’s share price, where they serve as useful tools for evaluating investment potential.

Next Article would cover key Liquidity ratios.

 

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