Info 1: ratio analysis definition
Info 2: how ratio analysis works
Info 3: ratio analysis vs fundamental analysis
Info 4: example of ratio analysis
Opening information:
Ratio analysis breaks into two words ratio and analysis, ratio means quantity relation between the two values or items, and analysis means research. Ratio analysis means research of sum based on the quantity relation between two amounts.
So now let’s have a look at what is a ratio analysis, how the ratio analysis works in the public market, and what is the difference between the ratio analysis and fundamental analysis, finally one brief example about the ratio analysis.
Info 1: ratio analysis definition
Mr. Peter is an electrician who helps his customers around his city with all of their work and needs, the greatest benefit for Peter is he offers and charges very little for quality work, and he earns 60,000 dollars yearly.
Next, Mr. Nick is the top neurologist who researches and helps regards all kinds of treatment that’s exposed to neurologists, where his income would be 450,000 dollars yearly.
Finally, Mr.Jessika is a designer who works very hard and delivers great dresses every season, among the other competitors. Where he makes money by her own business which is about 4 million dollars yearly.
When dividing Nick’s income with Perter’s income, Nick’s income is bigger than 7.5 times, at the same time by comparing Jessika’s income with Nick’s income, Jessika’s earnings are bigger than 8.8 times.
And by dividing Jessika’s income with Peter’s earrings, Jessika earned more than 66 times more than Peter’s.
Here the research of calculation which is used to find the number of times that each person’s income is less or more than that of another person is called ratio analysis.
Any of the calculations of research that is computed for the number of times to find any value, then they are known as a ratio analysis. So let’s dive into one know how the ratio analysis works in public Corporations among all public Corporations and Investors.
Info 2: how ratio analysis works
Ratio analysis doesn’t represent any of the specific only one analysis or things or objects, instead, it’s a concept to research to find the number of times one value or item is more or less when compared to any other things.
Therefore any of the calculations that compute for the answer of finding a times of money or value of assets is more or less, and profits or loss which demonstrated as a ratio analysis.
However, this ratio analysis helps millions of stock Investors to understand the risk involved in one public institution.
Supposedly if the calculation is not quite based on the research of compute to find the answer to several times which value or money occupied, then such research of sum is not considered as a ratio analysis.
If any of the stock Investors who dividends the market price with earnings per shares amount to find the number of times such Investors are paid more than its earnings, which is named as ratio analysis.
Next, the people divide the liabilities of the company with assets which shows the results of how much amount of times assets need to fulfill all the debts of the one company, where this calculation would be based on how much certain things would include. So it’s normalized with a ratio analysis of debt ratio.
Moreover, the person who uses the calculation to find the results of the number of times that such debts are bigger or lesser than equity is illustrated as a debts-equity ratio, so this sum would be categorized into the category of ratio analysis.
Any of the sum or math of research analysis takes place with dividing of understanding of numbers of times, then such things which what elaborate as a ratio analysis.
Info 3: ratio analysis vs fundamentals analysis
The difference between ratio analysis and fundamental analysis is, that ratio analysis refers to the research and calculation of finding the difference of one value with another.
On the other side, fundamentals analysis is the one which is used to analyze the basic things of one matter in business.
So the key difference between the ratio analysis and fundamental analysis is ratio analysis has become part of the fundamental analysis. To make you more clear about the ratio analysis, let’s see one brief example below.
Info 4: example of ratio analysis
Say the company U is a public institution, that reports the income and balance sheet statement with cash flow reports.
Over certain reports, company U had reported an income of 23 billion dollars and debts of 89 million dollars in the balance sheet of the Industry.
By dividing the 89 billion by 23 billion dollars, it would lead to an answer of 3.8. this demonstrates that company U needs 3.8 years to fulfill all the debt of the Industry using their income.
Here this 3.8 is ratio analysis, but the analysis the anything using the business statement would be considered a fundamental analysis.