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Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Introduction to Company Valuation. Fundamental Analysis Basics. Fundamental Analysis Tools and Methods. Valuing Non-Public Companies. Table of Contents Expand. Working Capital Ratio. Quick Ratio. Earnings per Share EPS. Debt-Equity Ratio. Return on Equity ROE. The Bottom Line. Key Takeaways Fundamental analysis relies on extracting data from corporate financial statements to compute various ratios.
There are five basic ratios that are often used to pick stocks for investment portfolios. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. These are some common profitability ratios:. A leverage ratio is a good way to easily see how much of your company's capital comes from debt and how likely it is that your company can meet its financial obligations.
Leverage ratios are similar to liquidity ratios, except that leverage ratios consider your totals, whereas liquidity ratios focus on your current assets and liabilities. Turnover ratios are used to measure your company's income against its assets. There are many different types of turnover ratios. Here are some common turnover ratios:. Market value ratios deal entirely with stocks and shares.
Many investors use these ratios to determine if your stocks are overpriced or underpriced. These are a couple of common market value ratios:.
Accounting is the language of business. It tells a story. While these formulas may seem like arcane number crunching, the results are bellwethers of your business's health. Running a successful business means learning from past mistakes and making healthy decisions for your future.
Without a basic understanding of accounting, you can't plan for your business's future. By taking the time to investigate and understand your business's financial health , you can make accurate decisions about your future and set your business up for success.
For example, total debt ratio can serve as a key indicator of whether it's the right time to take a new loan. The asset turnover ratio shows how valuable your assets are in relation to what you're producing. This can inform how you increase business efficiency or whether you invest in new assets. To run a successful business, you must have a clear picture of where you stand at any given time. Having clear books that are accurate and easy to interpret can ensure you're running a successful business.
There is a key difference between financial accounting and cost accounting: Financial accounting addresses the current financial health of a business, while cost accounting assesses only costs associated with the production of your business. Both can be used to better understand the financial standing of your company, but cost accounting is focused on profit and efficiency. Check out our infographic for a full list of basic accounting terms. Financial statement analysis is the process of understanding the risk and profitability of a firm through analysis of reported financial information.
Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation. Financial ratios may be used internally by managers within a firm, by current and potential shareholders and creditors of a firm, and other audiences interested in understanding the strengths and weaknesses of a company, especially compared to the company over time or compared to other companies.
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