Using ratios to analyse companies

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20. Conclusion

Number-crunching alone may not help you pick good shares, but it may stop you from investing in bad ones.

• Calculating some basic ratios is a useful way of checking whether shareholders' money is being used efficiently, and it can also reveal problems the management omits to mention.
• A clean bill of health is like a vet's certificate: it states that the horse is fit to run; it does not predict that it will win. So just because a company comes up with flying colours does not mean you should invest in it. Before you do that, you should consider looking at the wider factors like the general outlook for the industry it is in.
• Most of the ratios are fairly easy to calculate. Some attention is needed to notes in accounts, but the more time you spend looking at reports and accounts, the more familiar you will become with their nuances and subtleties.
• Ratios work best where they are used comparatively. As far as possible, considering the ratios of companies operating in the same sector, may distinguish the good from the bad.

You have now completed the course. To test your knowledge, take the Assessment test.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

• Magic Numbers