Financial Ratios
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There are three categories of financial ratios. Each category is designed to evaluate the financial “health” of the business from a different perspective. The three categories of financial ratios are
Liquidity: the ability of the organization to generate funds to meet its short term financial obligations.
Leverage: the portion of assets that have been financed through debt vs. equity financing and the organization ability to handle the debt that it has.
Profitability: the amount of profit generated by the business, the return on the investment by the shareholders or in the business.
Unlearn
However it is important to remember that no ratio alone tells the whole picture. We need to examine the range of ratios and understand the business in relation to its industry and particular environment in order to make a good judgment.
Relearn
Generally, the differences in approach between bankers and equity analysts are due to the fact that both have different interests when evaluating a company.
The key financial measures used by bankers include
Liquidity Ratios such as current ratio and quick ratio to measure the ability of the company to meet short term financial obligations.
Leverage Ratios such as debt to equity, debt to capital, interest coverage and cash flow to current maturity of LT debt to measure the risk introduced by borrowing.
The equity analyst is primarily interested in the earnings power of the companies. Other things being equal, the greater the earning potential of the issuer, the greater the upside potential of the stock. A good way to analyze earning power is to assess profitability ratios such as return on assets (ROA), return on equity (ROE) and return on invested capital (ROIC).
Learn
There are three categories of financial ratios. Each category is designed to evaluate the financial “health” of the business from a different perspective. The three categories of financial ratios are
Liquidity: the ability of the organization to generate funds to meet its short term financial obligations.
Leverage: the portion of assets that have been financed through debt vs. equity financing and the organization ability to handle the debt that it has.
Profitability: the amount of profit generated by the business, the return on the investment by the shareholders or in the business.
Unlearn
However it is important to remember that no ratio alone tells the whole picture. We need to examine the range of ratios and understand the business in relation to its industry and particular environment in order to make a good judgment.
Relearn
Generally, the differences in approach between bankers and equity analysts are due to the fact that both have different interests when evaluating a company.
The key financial measures used by bankers include
Liquidity Ratios such as current ratio and quick ratio to measure the ability of the company to meet short term financial obligations.
Leverage Ratios such as debt to equity, debt to capital, interest coverage and cash flow to current maturity of LT debt to measure the risk introduced by borrowing.
The equity analyst is primarily interested in the earnings power of the companies. Other things being equal, the greater the earning potential of the issuer, the greater the upside potential of the stock. A good way to analyze earning power is to assess profitability ratios such as return on assets (ROA), return on equity (ROE) and return on invested capital (ROIC).
1 comment:
Pretty loaded observation.
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