Financial Ratio Analysis
Financial ratios helps investor bridge the gap between
income statement, balance sheet and cash flow statement
by reconcilliate unit differences, make anonymous
numbers talks and reveal the hidden portion to
investors.
Ratio analysis provide valuable information about a company's financial health. A financial ratios are group into following categories listed below:
Investors
read and interpret financial ratios and uses it as a fundamental analysis tool to evaluate company
financial health and evaluate as to which company is a better
investment choice before make a decision on stock
investing or stock
pick.
Accounting-Based Financial Ratios
Accounting-based
financial ratios refer to Net Tangible Asset Backing (NTAB) or Book
Value (BV), P/BV ratio and price per earning ratio (PE).
Net Tangible Asset Backing "NTAB" or Book Value
(BV)
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Net Tangible Asset Backing NTAB also known as book value per share (BV). The formula for Net
Tangible Asset Backing ("NTAB") is:
NTAB = (Shareholders' Equity - Intangible Assets - Preference Shares)
/ Total Shares
It is supposed to show the actual net amount of
tangible assets represented by each ordinary share of
the company. It is an important component in the
calculation of the Price to Book Value Ratio ("P/BV
Ratio").
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P/BV ratio
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Price to Book Value P/BV Ratio is computed by dividing the market price
of a share by its NTAB. The ratio shows how much the
investor paid for each dollar of NTAB. In other words,
how many time premium an investor paid for each dollar
of NTAB (or BV). The share with
the lowest P/BV Ratio for the same industry represents
the best value. P/BV = Market
Price / NTAB
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Price/Earning Ratio(PE)
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The Price per Earning PE Ratio of a share is computed by dividing the
market price of the share by its EPS. It relates the
current profitability of a company with the price paid
by the investor for the share. For example, if an
investor buys a share with a PE Ratio of 10, the price
he paid for the share would be 10 times the current
profitability of the company. Some investment advisers
recommend caution when buying shares with PE Ratios
above 20. It's also recommend that the current PE Ratio
of a company be examined against its historical range
and against the current PE Ratios of similar companies.
PE = Market price per share /
Earnings per Share
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Accounting-based Financial Ratio