Decoding the financial ratios

Before we start to invest in a company, the best we should have read through theirs accounting reports. It is always is a difficulty for the lay person or people not from financial field. There a few Ratio that are important to investment decision making that derive from the accounting report.

1)Debt-to-equity ratio

DER shows how much a company's capital is dependent on external borrowings.Total liabilities and total equity can be found in its statement of financial position. Although this is not an all conclusive ratio, with an entity with a high DER can be vulnerable to economic downturn. On the flip side, a high DER company can also suggest that the company is expanding, so look for the information on its outlook and plans.

2)Operating Cash Flow

A healthy cash flow allows a business to meet its payments and keep its business solvent and operational. A company can report a net loss and still be in positive cash flow and vice versa. If a company that keeps reporting profit with shrinking cash flow or negative cash flow. This mean the company is not collecting their profit or just keep selling and not collecting. This kind company should be in a no no list for investor.

3)Earnings per share (EPS)

EPS is commonly used to indicate how profitability is a company. It shows how much profit the company is making for each share you own. A EPS of 2o meant , each share the company you hold it is making earning of 20sen. A small pay up capital company might have high EPS while a big corporation might have a low EPS. A financial company RCE CAPITAL might has a higher EPS then LION Corporation and vice versa. EPS is all depended on the Paid up capital and the paid up capital might change due to Right issue or bonus issue. EPS should be adjusted accordingly after the Right issue or Bonus issue. If a company have outstanding warranty,employee stock options or convertible loan stocks, this will also dilute the EPS of the company. Adjustment also be made accordingly.

4)Earnings before interest, taxes, depreciation and amortisation (Ebita)

Earnings, taxes and interest is found in a company's statement of comprehensive income. Depreciation and amortisation figures can been seen in the cash flow account. Ebita is way to tell whether a company is creating value for the shareholder. This figure should be positive and increase year by year. Ebita shows how much money a company made, while operating cash flow shows how much it has actually collect.

5)Return on equity (ROE)

ROE measures how much profit a company has generated with the money that shareholders has invested. The shareholders equity is the total equity that can be found in company's statement of financial position. Meanwhile, net profit can be read in the income account. ROE is an indicator how well a company capital is being reinvested. It also an indicator for how well the company is creating value for its shareholders.

6)Price - Earning Ratio (PE)

This is most common ratio and most used ratio by analysts and fund managers.
It shows how much investor are willing to pay for every dollar of a company earnings. Some analysts or fund managers are using projected PE on their analysis. As for some , they uses previous earning as the calculation on the PE.
Anyway of calculation is depend on the way we look at company earning.
For one thing for sure , the lower the PE is better as what Warren Buffett will look at. As for me ,I will definitely will look a company with PE of 10 and below.
On the market average ratio KLCI index was in PE of 16.92 , Singapore Straits Times index' 10.59 and the Thailand Stock exchange index's was 17.40 .