For the newbie investor, figuring out what to do with your money can be a scary and intimidating thing. And once you do figure out which companies you want to invest in, there’s the inevitable task of poring over those companies’ financial statements. Financial ratios, however, can help make sense of all that monetary jargon. Knowing what small bits of information to pick out, and how to interpret the data found, from convoluted financial statements is an important tool all investors should know. Here are 10 commonly used financial ratios that should be a part of every beginner investor’s research method.

1. Current Ratio (current assets / current liabilities)

The current ratio is used to test a company’s liquidity as well as to determine if a company’s short-term assets can pay off its short-term liabilities. So, a ratio over 1.0 means the business has more assets than debts, but if the opposite is true, and its ratio is under 1.0, the business is more vulnerable to economic swings.

2. Debt-to-Capital Ratio (fraction of debt / long-term capitalization)

Expressed as a percentage, the debt-to-capital ratio shows how a company finances its business operations, i.e. what percentage is financed through shareholder equity or debt. A higher number means a company has more debt compared to its capital structure, and a ratio under 40% is generally considered to be good. Just be aware that this ratio can vary widely from industry to industry. 

3. Debt-to-Equity Ratio (total liabilities / shareholder’s equity)

The debt-to-equity ratio is a measurement of how much suppliers, lenders, creditors, and obligors have committed to the company versus what the shareholders have committed. While it is not a pure measurement of a company’s debt, it is mainly used to help determine a company’s financial health. A lower number means a company has a stronger equity position.

4. Dividend Payout Ratio (dividends per common share / earnings per share)

Print Friendly, PDF & Email

Related Posts