Ratio Analysis

Ratio analysis is often used in stock analysis and fundamental analysis. Ratio analysis of financial statements of a company is quick, easy, and often used as the first gauge of the financial health of the company or stock. Financial ratio analysis has limitations but also importance. Below is a list of ratios used in ratio analysis of financial statements. You can input the ratios on a spreadsheet and automatically perform ratio analysis.

The importance of financial ratio analysis

Why is financial ratio analysis important? Financial ratio analysis is important in the first step of financial analysis because the numbers tell the story of the financial health of the company, and hence stocks. As soon as financial statements are released, stock analysts would analyze them, starting with ratio analysis of the financial statements. Some analysis would do the ratio analysis in their head to gauge the preliminary financial health of the company.

Ratio analysis spreadsheet 

It is a common practice to have ratio analysis spreadsheet on hand so that whenever the financial statements come out, the analyst would know immediately what the finances of the company look like before going into further details. Ratio analysis tremendously helps stock analysis.

Ratio analysis - the limitation 

Ratio analysis has its limitation. First of all, ratio analysis does not tell the whole story of the company. There are many reasons why the use of ratio analysis is limited since unfavorable ratio analysis results do not necessarily mean the company is in financial trouble. There may be perfectly sound explanations of why the ratio analysis comes out bad. Ratio analysis does not take into account plans for the future of the company, ability of new CEO, or new marketing strategies. Ratio analysis takes a snap shot of the company's financial statements and tell the story as is, rather than what potentially could be which is more important when investing in a stock.