Ratio Analysis is a great way for beginner and seasoned investors to wade through financial jargon in company reports and announcements. They can be used to measure a company’s performance over time, compare it to other companies and sectors. They are also used to gauge the performance of management. How well management are using debt, assets, and equity to generate returns for shareholders. Most importantly, ratios can be used to find companies that have cash flow, liquidity, and debt issues. Thus avoiding these stocks.

Ratio analysis goes a longways to explaining why a share price is where it is. They are indicators for investors as to the financial performance of a company. As any decline in these indicators will need further investigation. To assess the viability of the company and if it still meets investment criteria.

They can be incorporated into any investment strategy. Such as, value and growth investing strategies, are widely published, have a long record of use within accounting and the financial industries. Therefor, they are widely excepted as reliable tools that investors should use!