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Financial Ratios

Financial ratios are the fundamental tools of financial analysis. A calculation of profitability, asset utilization and financial leverage ratios can result in key insights about a company’s operations.

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  1. Obtain information. Use the income statement, balance sheet, and cash flow statement from annual reports to obtain data required to calculate the ratios for the company as a whole. Access databases such as Excel, Bloomberg, Datastream, and World Equities to obtain supporting data and information. Obtain information about divisions from management.
  2. Calculate key ratios. Calculate the most relevant ratios and margins, such as profitability, asset turnover, and financial leverage ratios. The ratios of importance will vary by industry. Assess the capital structure, operating efficiency, free cash flow, and returns to shareholders.
  3. Compare against competitors’ ratios. Compare the ratios to those of key competitors and determine the reasons for discrepancies.