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Introduction to Financial Ratios used in Stock Analysis



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Hello and welcome to this session on Financial ratios / numbers

Financial Analysis

When we are doing fundamental analysis on equities, a study on the financial aspects of the company is one of the most important factors.

Financial analysis is often done soon after studying the macro economics, micro economics, sectoral study and the management of the company.

Financial analysis is the process of evaluating businesses, projects, budgets and other finance-related entities to determine their performance and suitability.

A financially sound investment not only allows us to make profits but also gives some margin of safety if at all the stock tumbles downwards.

There are several financial ratios and numbers that we can study to determine the company performance.

But this is more of finance / commerce student topic than for us.

Hence, I will focus on how to use the numbers for our fundamental analysis only.

This is because, if I explain the terms in detail, it will cause more confusion than clarity for a non-commerce backgrounder.

Four types of Financial Rations

For the sake of understanding, remember that there are four types of financials ratios:

1. Financial Ratios

2. Profitability Ratios

3. Leverage Ratios

4. Operating ratios

So every ratio that we will discuss will come under one or the type mentioned above.

We will use Financials number / ratios for stock evaluations such as:

1. Determining the financial status of the company

2. Determining if the share price is fair or not

3. Comparing similar companies and determining the best ones

Ratios are just numbers.

So do not get scared about mathematical calculations.

Screener, MoneyControl and other websites will give ready made numbers after calculations.

All you have to do is analyse and understand them and take decisions.

One important thing you have to remember is:

Use only one website to get all your financial ratios data.

Because .. the ratio numbers might appear different on different websites

Because .. the website may or may not have updated the latest quarterly results data into the calculations

I follow MoneyControl for our examples.

This is why i asked you all to install the app.

Most financials numbers are usually updated after every quarterly results are announced.

So, long term investors need not have to monitor these numbers on a daily basis.

Just once in a quarter, or when comparing with other companies.

The financial ratios / numbers I will be focusing in the next few days are:

1. Stock PE and Industry PE

2. Book Value

3. Operating Profit Margin

As an investor, we need to know these (and if time permits many others) for each of the company we are invested in.

In most cases, each of these ratios gives a completely different understanding of the financial strength of a company.

Further, we need to use a combination of all these factors and not use just one of them to arrive at a conclusion.

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