Successful business owners are constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of a company's effectiveness, however, one needs to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of financial statements and make the seemingly inconsequential numbers accessible and comprehensible.
Analysts interpret the numbers on financial statements (10Q's filed quarterly, 10K's filed annually, all available for free from either the company website, or here from the SEC) using a variety of ratios and other comparative measures. Such analysis covers:This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify a company's strengths and weaknesses, evaluate its financial position, and understand any risks you may be taking by investing in it.
As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes such as the StockCentral Screener, Take Stock Online™, and discussion in our community forums, comparative ratios can be invaluable.