Something new to us is the ratios you see in the sidebar. These ratios are used to get a feeling for a company’s liquidity, activity, and profitability. The ratios are broken into three categories called Solvency (liquidity), Efficiency (activity), and Profitability. So what do these mean?
Solvency, or liquidity, is about how fast a company can turn its assets in cash. It provides a lenders perspective. This is important because as an investor you want to know if a company is able to meet its financial obligations on TIME, and you can’t do this unless you have cash on hand or assets that can be quickly liquidated.
Efficiency, or activity, lets investors now how smoothly a company is run. This provides a management perspective. These ratios show how a company uses and controls its assets. Companies that have shown strength in their management for several years will be more likely to succeed in the coming years.
Profitability gives the owners perspective. These are pretty simple. Here the ratios can tell an investor how successful a company is in their market. Not only can we look at net profit but these ratios allow us to see a profit on key components of a company like sales and assets.
Overall if you are looking to invest in a company, you should take a glance at its ratios. A good company shows growth in all three categories. The more consistent the growth the more likely you are to be successful in that investment. Check out the ratios in the sidebar or comment below on the companies you’d like us to breakdown!
Categories: Financial Information