Skip to main content
Business LibreTexts

Chapter 5: Fundamental Analysis: Financial Statements and Ratio Analysis

  • Page ID
    79434
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    “If an accountant’s spouse cannot sleep at night, all he or she has to say is, “Dear, tell me about your day at work.”

    Learning Objectives

    In this chapter and the chapter 5 Canvas module, class website, and Introduction to Investment Discussion Forum, you will

    By the end of this chapter and the Canvas module or class website, you should be able to

    Ratio Analysis Rounds Out the Investigation of Our Potential Stock Investments

    In the previous chapter, we learned some powerful techniques that give us a “yes/no, continue researching/don’t continue researching” kind of answer, even though we know that we should never place much credence in the result. In this chapter, we learn how to compute and analyze many financial ratios using the financial statements that a public company must publish quarterly. Financial ratios do not give us a “yes/no” answer about an individual stock. Rather, we treat financial ratios like a stew of information that gives us a more rounded analysis of our potential investment and allows us to compare our stock with its competitors and the market as a whole. The financial statements that we utilize to compute our financial ratios are also very handy whenever we are experiencing a bit of sleeplessness. Just ask any accountant's spouse!

    Presentation file - Study guide

    • 5.1: Financial Statements
      Every publicly-traded corporation must publish their financial statements every three months. The three financial statements are the Balance Sheet, the Income Statement, and the Cash Flow Statement. Luckily, the accountants are tasked with creating the financial statements. We investors just need to learn how to read them and pick out the important elements. We use the financial statements to create financial ratios that help us "round out" our research into our potential stock investments.
    • 5.2: Common Stock Ratios
      The Common Stock Ratios convert key information about a firm to a per share basis. Most are readily available from all stock information sources.
    • 5.3: Profitability Ratios
      The Profitability Ratios are popular ratios that measure a firm’s returns by relating profits to sales, assets, equity, and invested capital.
    • 5.4: Liquidity Ratios
      Liquidity Ratios measure a firm’s ability to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due. "Can we make payroll this week?"
    • 5.5: Activity Ratios
      Activity Ratios measure how well a firm is managing its accounts receivable, inventory, and total assets.
    • 5.6: Leverage Ratios
      Leverage Ratios are used to measure the amount of debt being used to support operations and the ability of the firm to service its debt.
    • 5.S: Summary
      Congratulations ‒ You Have Finished Chapter 5 ‒ Fundamental Analysis: Financial Statements and Ratio Analysis


    This page titled Chapter 5: Fundamental Analysis: Financial Statements and Ratio Analysis is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Frank Paiano.

    • Was this article helpful?