Ratio Analysis is a great way to wade through financial jargon in company reports and announcements. They can be used to measure a company’s performance over time, compare it to other companies and sectors. They are used to gauge the performance of management; how well they are using debt, assets, and equity to generate returns for shareholders. Most importantly, ratios can be used to identify companies that have cash flow, liquidity, and debt issues. Thus avoiding these stocks and potentially increasing returns.

Ratio analysis does not reveal the whole picture, but it does go a longways to explaining why a share price is where it is, and provides indicators for investors as to the financial performance of a company and any decline in these indicators will require further investigation. As to assess the viability of the company and if it still meets investment criteria.

They can be incorporated into any investment strategy, are widely published, have long record of use within accounting and the financial industries, and therefor widely excepted as reliable tools that investors should use!