Ratio Analysis

Tweet 1

What it is:
Ratio analysis is the exercise of calculating various pieces of financial data in relation to one
another.

How it works/Example:
There are dozens of financial ratios out there. In fact, there are too many to list here in this
definition. Some examples of ratios used in financial ratio analysis include the price-to-sales
ratio:
Price-to-Sales Ratio = Market Capitalization/Annual Sales
or
Price-to-Sales Ratio = Share Price/Revenue per Share
One of the most famous ratios in finance is the P/E ratio, which is price per share/earnings
per share.
The formula for the PEGY ratio is:
PEGY = P/E Ratio/(Earnings Growth Rate + Dividend Yield)

Why it Matters:
Active investment strategies generally dismiss long-term trends and focus on short-term
profits, whereas passive investors maintain that long-term price movements are important and
often predictable. This is why active investors often use quantitative and technical analyses,
including ratio analysis, stock chart analysis, and other mathematical measures to determine
whether to buy or sell.
Regardless of the investment method, however, ratio analysis is crucial to understanding an
investment. After all, it is through ratio analysis that we detect whether a company is
encountering difficulties paying the bills, taking too long to collect money from customers,
unable to pay its debts, whether its stock is overpriced, and a wide variety of other insights.
The mathematics typically only involve simple division, but the insights they yield can be
invaluable.
Related Terms View All

Recording Fee

Delivery Price

Oil Sands

U.S. League of Savings Institutions

Unsecured Debt

Chapter X

Tape Is Late