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16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses

by Joe Lan, CFA

In the previous installments of AAII’s Financial Statement Analysis series, I discussed the three most commonly used financial statements—the income statement, balance sheet and cash flow statement.

In this installment of the series, I take an in-depth look at the most commonly used financial ratios. Click here for a downloadable spreadsheet that automatically calculates these ratios using financial statement inputs that you provide. Click here for detailed explanations on creating the ratios for Stock Investor Pro users.

Ratio Analysis

Over the years, investors and analysts have developed numerous analytical tools, concepts and techniques to compare the relative strengths and weaknesses of companies. These tools, concepts and techniques form the basis of fundamental analysis.

Ratio analysis is a tool that was developed to perform quantitative analysis on numbers found on financial statements. Ratios help link the three financial statements together and offer figures that are comparable between companies and across industries and sectors. Ratio analysis is one of the most widely used fundamental analysis techniques.

However, financial ratios vary across different industries and sectors and comparisons between completely different types of companies are often not valid. In addition, it is important to analyze trends in company ratios instead of solely emphasizing a single period’s figures.

What is a ratio? It’s a mathematical expression relating one number to another, often providing a relative comparison. Financial ratios are no different—they form a basis of comparison between figures found on financial statements. As with all types of fundamental analysis, it is often most useful to compare the financial ratios of a firm to those of other companies.

Financial ratios fall into several categories. For the purpose of this analysis, the commonly used ratios are grouped...