Financial ratios: digesting them together

I hope that after studying the series of posts about company financial statements, you stopped being afraid of them. I suggest we build on that success and dive into the fascinating world of financial ratios. What is it?

Let's look at the following example. Let's say you open up a company's balance sheet and see that the amount of debt is $100 million. Do you think this is a lot or a little? To me, it's definitely a big deal. But can we say the company has a huge debt based only on how we feel about it? I don't think so.

However, if you find that a company that generates $10 billion in annual revenue has $100 million in debt (i.e. only 1% of revenue), what would you say then? That's objectively small, isn't it?

It turns out that without correlating one indicator with another, we cannot draw any objective conclusion. This correlation is called the Financial Ratio.

The recipe for a normal financial ratio is simple: we take one or two indicators from the financial statements, add some market data, put it all into a formula that includes a division operation - we obtain the financial ratio.

In TradingView you can find a lot of financial ratios in the section Financials -> Statistics.

However, I only use a few financial ratios which give me an idea about the financial situation of the company and its value:

What can you notice when looking at this table?
- Profit and revenue are frequent components of financial ratios because they are universal units of measurement for other reporting components. Just as length can be measured in feet and weight in pounds, a company's debts can be measured in revenues.
- Some financial ratios are ratios, some are percentages, and some are days.
- There are no financial ratios in the table whose data source is the Cash Flow Statement. The fact is that cash flows are rarely used in financial ratios because they can change drastically from quarter to quarter. This is especially true for financial and investment cash flow. That's why I recommend analyzing cash flows separately.

In my next post, I'll break down each financial ratio from this table in detail and explain why I use them specifically. See you soon!

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