Business & Financial Ratios

Morningstar describes financial statements as "windows into a company's performance and health."  They certainly are that, and so much more.  As noted in the Searching EDGAR guide, financial statements as found in a company's 10-Q and 10-K reports yield a wealth of data about a company. This data can be plugged into standard formulas, thus producing insights that can uncover otherwise hidden realities about the financial health of the company.  These formulas are known as business / financial ratios.    

According to the Oxford Handbook of International Financial Terms, ratio analysis is "a collective term for analytical methods based on an organization's financial statements and used as indicators of financial position."  The Handbook notes that ratio analysis also can be conducted on non-profit organizations.

Morningstar notes that some ratios are useful in and of themselves, but most are useless if not put into some kind of context (compared against themselves over time; compared against other like companies in an industry, etc.).  [NOTE:  In order to understand how to find industry benchmarks, you will need to understand the SIC / NAICS system]. 

You can find ratios going back 5 years or more for individual companies by going into Standard & Poor's Global NetAdvantage database.

Once you are in the database, search for your company by name or ticker symbol in the "Simple Search" box.  After the results for your company are delivered, click on "Financials" in the left navigation sidebar. 

 In the IBISWorld Database, each industry profile has a "Key Statistics" section that lists several industry ratios going back about 5 years, and with forecasts for 3 years into the future.

Though opinions will vary, in general, typical financial ratios can be classified into the following basic categories (some sample ratios are provided):

• Efficiency / Operations:  measures how effectively a company utilizes its assets and manages its liabilities
  • Inventory Turnover
  • Total Asset Turnover   
• Leverage / Risk:  measures how much debt a company has on its balance sheet
  • Debt/Equity
  • Interest Coverage
• Liquidity:  measures a company's ability to meet near-term obligations
  • Current
  • Quick
• Market:  measures investors' assessment of a company's performance
  • EPS (earnings-per-share)
  • Dividend Yield
• Profitability:  measures how good a company is at running its business
  • Gross Margin
  • Return on Assets

Most recent volumes are held at the Floor 2 Reference Desk.  Older volumes are either in the Floor 2 Reference stacks, or on Floor 4 stacks -- all filed under the same call numbers as these.