How To - Use Profitability Ratios to Make Decisions

When you are considering a company as a prospective investment target, firstly review its financial statements. Look at the profitability ratios.

Calculate the ratios for that company over the last 3 –5 years then compare them with other companies.

See if the earnings are consistent, growing or declining.

Compare that company’s ratio with company’s that are in the same industry as this will help you determine accurately whether your candidate is standing in the industry or starting to fall behind.

Also look at other financial information on the income statements as well as the Balance Sheet. Pay particular attention to any items that are showing as losses.


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