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Do it Yourself : Ratio analysis to make investment decisions

Updated: Sep 29, 2019

Why are Financial Ratios important?

Imagine you have to take multiple decisions to invest in a basket of stocks within a short span of time, you have loads of financial statement information to go through like balance sheet, profit and loss statement, cash flows etc . Now this can’t be done within a day, it would require days of reading and analysis, this is where financial ratios come to rescue.

Ratios can be very helpful in identifying and determining where a company’s position is standing. Ratios can also help in comparing the financial position of the stock in which we want to invest in with that of the industry or similar line of companies.

Valuation of investment is a complex process and only technical experts or valuation experts can understand that process, calculating quick and simple financial ratios of a company can act as saviour for people like us. Financial ratios can be used to perform quantitative analysis of the company and also assessing the companies growth potential, liquidity, leverage, efficiency and profitability.

If you have good command and understanding of the calculation of financial ratios, it would be a cake walk to analyse and perform the sound worthiness of a company for the purpose of investment.

Types of Financial Ratios which can be used for Stock Analysis

Price/Equity Ratio - The PE ratio determines how much a stock investor is willing to pay

for each rupee of earning. Some people confuse P/E ratio with means of determining the valuation of company, P/E ratio is simply (Ear