10 Financial Ratios Every Stock Investor Should Know

Overview

A complete grasp of a company’s financial situation is necessary before investing in stocks, and this may best be determined by analyzing financial statements. To do this, carefully review the cash flow, income, and balance sheets to make well-informed investment selections. Understanding these financial documents is essential for navigating the local stock market and spotting interesting investment opportunities in the Philippines, where the market has its distinct characteristics.

Financial Statement Analysis’s Significance

Investors who want to comprehend a company’s financial performance and position must possess the important ability of financial statement analysis. Investors can evaluate these statements to determine profitability, liquidity, solvency, and efficiency—all of which are critical for making well-informed judgments about stock investments. This research aids investors in the Philippines in navigating the subtleties of the local market and helps them make smarter investment decisions in a developing but intricate economy.

Important Financial Statements

Equilibrium Report

A company’s financial situation is shown in snapshot form on the balance sheet at a given point in time. It enumerates the shareholders’ equity, liabilities, and assets.

Assets are the resources that belong to the business. They include non-current assets like property, plant, and equipment as well as current assets like cash and accounts receivable.

Liabilities:

These are debts that the business has, including long-term, accounts payable, and short-term debt.

Net income is the amount of profit that is left over after all costs have been subtracted from revenue.

In the Philippines, understanding income streams may help one understand consumer demand, and understanding expense management can help one understand how efficiently businesses are run.

Statement of Cash Flow

A company’s cash inflows and outflows are broken down into three categories: financing, investment, and operating. This is shown in the cash flow statement.

Operating Activities:

These are financial activities about the day-to-day running of the company, like cash receipts from sales and cash payments to staff members and suppliers.

Investing Activities:

These include the cash flows from the purchase and sale of assets, such as machinery or shares in other businesses.

Financing Activities:

These include cash flows from dividend payments, equity issuance, and debt borrowing and repayment.

Knowing cash flow is essential for Filipino investors, particularly in light of the possible volatility in emerging markets.

Metrics and Ratios in Finance

Investors utilize a variety of financial measures and metrics to go deeper into financial statement analysis:

Ratios of Liquidity

The current ratio assesses how well-positioned the business is to meet short-term liabilities with short-term assets. Strong liquidity is indicated by a ratio greater than 1.

Current Assets = Current Ratio

Present Debts

Current Liabilities = Current Ratio

Present-day Resources

Quick Ratio: This provides a more stringent measure of liquidity than the current ratio since it does not include inventories.

Quick Ratio is equal to Current Assets – Inventory

Present Debts

Current Liabilities / Quick Ratio

Present Assets − Stock

Turnover Ratios Net Profit Margin: Shows the portion of income that is left over after expenses are paid.

Net Income Margin × Revenue equals Net Profit Margin

Margin of Net Profit = Revenue

Net Income (Ï100)

ROI, or return on equity, calculates the return on equity for shareholders.

ROE is equal to net income.

100 is the shareholders’ equity.

RE = Equity Held by Shareholders

Net Income (Ï100)

Rations of Solvency

The Ratio of Debt to Equity: evaluates the financial leverage of the business by contrasting its total debt with its shareholders’ equity.

Total Liabilities = Debt to Equity Ratio

Equity of Shareholders

Equity Held by Shareholders = Debt to Equity Ratio

Total Debt

Useful Implementation in the Philippine Industry

Assessing Regional Businesses

When examining local enterprises, Filipino investors must take into account the distinctive features of the Philippine economy and commercial landscape. This covers elements like the effect of remittances, the expansion of the BPO industry, and programs for infrastructure development.

Industry Analysis:

Due to their rapid expansion in the Philippines, several businesses, such as real estate and BPO, may exhibit distinct financial characteristics.

Economic Policies:

The performance and forecasts of the financial system can be greatly impacted by government initiatives like infrastructure development and tax breaks.

Market Conditions:

Accurate assessments can be made by having a thorough understanding of the local market conditions, including consumer behavior and the competitive landscape.

Jollibee Foods Corporation (JFC) Case Study

Let’s examine Jollibee Foods Corporation (JFC), a well-liked stock among regional investors and one of the biggest fast-food chains in the Philippines, as a real-world example.

Balance Sheet Analysis:

Evaluate JFC’s assets, especially its property, plant, and equipment investments driven by expansion, and compare them to its obligations to get a sense of its financial health and leverage.

Analyzing patterns in spending, especially about marketing and cost control, and assessing revenue growth from both local and foreign activities are two aspects of income statement analysis.

Cash Flow Analysis:

Analyzing operating cash flow to make sure that the company’s core operations provide enough cash flow, as well as looking at financing and investing cash flows to see how JFC finances its growth and gives shareholders value.

In Summary

A vital component of stock investment is the analysis of financial statements, which offer vital information about the present and future financial standing of a firm. This research needs to take into consideration the unique economic and commercial climate of the Philippines for investors. Through meticulous examination of the cash flow, income, and balance sheets along with the use of pertinent financial ratios, investors can improve their chances of making profitable investments in the Philippine stock market by making well-informed judgments.

A multi-award-winning blogger and advocate for OFWs and investment literacy; recipient of the Mass Media Advocacy Award, Philippine Expat Blog Award, and Most Outstanding Balikbayan Award. Her first book, The Global Filipino Bloggers OFW Edition, was launched at the Philippine Embassy in Kuwait. A certified Registered Financial Planner of the Philippines specializing in the Stock Market. A recognized author of the National Book Development Board of the Philippines. Co-founder of Teachers Specialist Organization in Kuwait (TSOK) and Filipino Bloggers in Kuwait (FBK). An international member of writing and poetry. Published more than 10 books.  Read more: About DiaryNiGracia