The ratio analysis technique is also called cross-sectional analysis, providing you with important information about a company's financial strength. Cross-sectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business.
Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are:
i) Price-Earnings Ratio((P-E ratio):It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period.
ii) EPS (Earnings Per Share):It is that portion of a company's net income, which corresponds to each share of that company's common stock which is issued and outstanding. EPS gives an indication of the profitability of a company.
It is calculated using the formula:EPS = Net Income-Dividends on Preferred Stock / Average Outstanding Shares
iii) Current Ratio: Companies need a surplus supply of current assets in order to meet their current liabilities.
They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts.
It is a type of Liquidity ratio.Current Ratio = Current Assets / Current Liabilities
Monday, April 6, 2009
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