If you are an investor in equity or an owner of a business or if you are interested in starting investing in equity or a business, learning to read financial statements is a must. When I say financial statement, I mean by that is, Balance Sheet, Profit and Loss Statement and my personal favourite, Cash Flow Statement.
Once you start reading financial statements, soon you will realize that just glancing through the numbers won’t make much sense if you are not in a position to interpret those numbers. Here comes the importance of financial ratios.
A financial ratio or accounting ratio is a mathematical calculation using 2 or more financial numbers taken from the financial statement taken from the annual report of a company.
Financial ratios help to interpret the performance of a business from different viewpoints. Also, ratio analysis helps in comparing two industries or 2 companies in the same industries. Even though there are hundreds of financial ratios available, based on my experience there are a few ratios that are most important and that is what is all needed to make a sound judgement of the performance of a company or an industry.
Following are the ratios that I use personally to study the performance of a company. You can use the link of other sites attached to the ratios given below to study each one in detail. As and when I write in detail about each ratio, I will put a link against each ratio.
- Reinvestment rate
- Return on incremental capital investment
- Intrinsic value compounding rate
- Reserves and surplus growth
- Sales growth
- Gross profit growth
- Net profit growth
- Adjusted EPS growth rate
- CFO growth
- FCF growth
- Gross profit margin
- Operating profit margin
- Net profit margin
- ROCE (Without tax deduction)
- ROCE (After-tax deduction)
- Return on equity
- Return on assets
- Creditors days (payable days)
- Debtors days (Receivable days)
- Inventory turnover days
- Working capital days
- Fixed asset turnover
- Debt to equity ratio
- Current Ratio
- Quick Ratio
- Interest coverage ratio
- OCF/Net profit ratio
- CAPEX/OCF