Top-10 Ratios to Watch When Investing

When you start investing, one of the first challenges is choosing the right company. There’s a flood of data: graphs, ratios, financial statements, and you can easily spend over an hour analyzing just one company, that limits your time to chose the right one.

Broadly speaking, there are two main approaches to analyzing stocks:

• fundamental analysis – company financials, historical performance, valuation and branding strength.

• technical analysis – stock charts and price movements (yes, all those wiggly graphs). P.S. This article focuses on fundamental analysis, but if you’re curious about technical analysis too - leave a comment and I might cover it next!

The key to meaningful fundamental analysis is comparing financial ratios across companies within the same sector or industry.

Here are the 5 main categories to focus on:

1. Valuation: Is the price I'm paying for this stock reasonable relative to its earnings?

2. Profitability: How well is the company generating profits compared to its peers?

3. Liquidity: Can the company meet its short-term obligations using its current assets?

4. Solvency: Is the company capable of covering its long-term debts?

Efficiency: How effectively is the company using its resources to generate revenue?