Financial Ratios and Analysis

Clauric

Hi all,

I was looking to get some feedback from investment minded boardies.

I am doing some academic research into the financial ratios used by various investors when analysising company shares/securities, especially regarding buy, sell or hold calls.

What I am trying to determine is:

• Using the year end financial statements of a company, which ratios (if any) do investors find most helpful or useful in determining the future health and profitability of a company?
• Using the year end financial statements of a company, which ratios (if any) do investors find least helpful or useful in determining the future health and profitability of a company?
• Does comparing the ratios used with the average ratio across the same industry (industry norms) help or hinder the analysis?
• How much does multiyear analysis as opposed to single year analysis play a part in decision making process? (i.e. do you find multiyear analysis a good or bad decision making tool?)
• Are there other sources of information, such as the CEO/Chairman's report, which give more of an incling into the company's future, than ratio analysis?

Any feedback would be gratefully appreciate. If you feel uncomfortable/unwilling to discuss your strategies on the thread, please feel free to PM me with your feedback. All information will be treated with the strictest confidence, and will only be used for academic purposes.

Many thanks,

Clauric

A Primal Nut

I'm very far from an expert but based on what I read:

Clauric wrote: »

[*]Using the year end financial statements of a company, which ratios (if any) do investors find most helpful or useful in determining the future health and profitability of a company?

P/E
Return to Equity
Debt Ratio
Price to Book
Earnings per share compared with the previous year

[*]Does comparing the ratios used with the average ratio across the same industry (industry norms) help or hinder the analysis?

It's a good guide but on there own are not enough. There is probably a good reason why one company's P/E is lower than another other than that one is good value. For example, compare the P/E of Telefonica with Vodafone, due to Telefonica's debt, not because Telefonica is better value.

[*]How much does multiyear analysis as opposed to single year analysis play a part in decision making process? (i.e. do you find multiyear analysis a good or bad decision making tool?)

It's definitely something you'd take into account.

[*]Are there other sources of information, such as the CEO/Chairman's report, which give more of an incling into the company's future, than ratio analysis?

It's a good indication of how trustworthy the BoD are - do they meet commitments they set out in the previous year's report, or do they keep overestimating their company's future performance?

The main reason I replied is because I have created portfolios on www.finviz.com using high RoE, low RoE and different things based on ratios to see if I notice any trends as time goes on. Nothing really so far but I'll let you know.

Clauric

Thanks Nut.

I'm rather surprised that I only got one reply (pm or post). As I said, I'm doing this for academic purposes. I could do with some more responses, as part of the research is trying to establish which sets of data day-traders, and part-time traders use, especially when compared to the traders from financial houses and banks.

Any help with the research, which will be held in the strictest confidence, would be gratefully appreciated.

ixus

You would be better off doing one of those survey monkey things and asking people to fill them out as part of your academic studies.

Use more specific questions maybe?

Day traders don't use P/E's or value investing so maybe you need to get a clearer picturer of what you're doing.

IF I was a value investor, I would look at the structure of the board,who they have on it and how they manage their affairs. THEN, I would look at their finances and how they run their finances. THEN I would look at their business outlook.

It would be a top down approach, proven people with a track record who know how to manage finances and are onto a new idea or can continue to grow.