Analyzing Financial Ratios for Your Selected Company

 

How to Analyze Financial Ratios Without Losing Your Mind (Or Your Money)

Alright—so, you've picked a company to study. Maybe it's Tesla. Maybe it’s a small business you admire. Maybe you're just doing a class project and your professor said “pick any public company.” Now you're staring at rows of numbers, ratios, and terms that feel like they belong in another dimension. Sound familiar?

Yeah. I’ve been there too.

But here's the good news: financial ratios aren’t as scary as they seem. In fact, they can be kind of interesting once you get the hang of them. They tell a story. Not a boring one either—but a story of survival, growth, struggle, and strategy. And today, I’m going to show you how to actually read that story.

No Wall Street jargon. No robot-speak. Just real talk.

First off, why even care about financial ratios?

Think of a company like a person. Ratios are like its health stats. You don’t need to be a doctor to notice if someone’s heartbeat is way too fast or if they haven’t slept in days, right? Same thing here. These numbers show whether a business is healthy, sick, or on life support.

When I first looked at Apple’s financial ratios for a project, I was just trying to get it over with. But then I saw how each ratio kind of answered a different question. Like, “Can Apple cover its short-term bills?” “How much debt are they juggling?” “Are they making good money off their assets?”

And suddenly, I wasn’t just reading numbers. I was figuring out how this giant company was running.

1. Liquidity Ratios: The ‘Can We Pay Rent This Month?’ Check

This is the first thing I look at. I mean, if a company can’t cover its short-term bills, it doesn’t matter how amazing its product is.

• Current Ratio = Current Assets ÷ Current Liabilities

  Anything above 1 usually means they’re fine. Below 1? Might be tight.

• Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities

  This one’s more hardcore. It says, “What if we can’t sell that inventory fast?” Still above 1? That’s a relief.

In real life, I compared two retail companies last semester. One had a current ratio of 1.6, and the other? 0.9. Guess which one had cash flow issues? Yep—the one under 1.

2. Profitability Ratios: Are We Actually Making Money or Just Surviving?

I think this is the part that most people care about—even if they don’t realize it. You want to know if the business is actually profitable, not just busy.

• Net Profit Margin = Net Income ÷ Revenue

  It shows how much of each dollar made turns into profit. Higher is better.

• Return on Assets (ROA) = Net Income ÷ Total Assets

  This tells you if the company is using what it owns efficiently.

• Return on Equity (ROE) = Net Income ÷ Shareholders’ Equity

  Basically, “How good are we at turning investor money into more money?”

When I looked at Microsoft’s ROE, I was kind of blown away. It was super high—like, in the 40% range. That means for every $1 shareholders had in the company, Microsoft earned $0.40. That’s wild.

3. Leverage Ratios: Are We Living on Credit Cards?

Debt can be helpful. But too much? That’s dangerous. Especially if sales start dropping. So I always check this next.

• Debt-to-Equity Ratio = Total Debt ÷ Total Equity

  A ratio over 2 might mean the company’s relying heavily on borrowed money.

• Interest Coverage Ratio = EBIT ÷ Interest Expense

  Can the company even pay the interest on its loans? If this is below 1, they’re basically borrowing just to stay afloat.

I once reviewed a shipping company for a class, and its debt-to-equity was around 3.5. That means for every $1 owned, it owed $3.50. Ouch. Especially in an industry with high costs and unpredictable demand.

4. Efficiency Ratios: Are We Wasting Time (and Money)?

These ratios helped me understand how fast things are moving inside the company. Like, are we selling inventory quickly? Are customers paying us back?

• Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

  Higher is better. It means products aren’t just sitting there.

• Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable

  How fast do we get paid? If it’s low, that’s a cash flow problem waiting to happen.

I remember comparing Costco and a local grocer. Costco’s inventory turnover was way higher—like 11 versus 3. They’re moving stuff fast, which helps keep prices low.

5. Market Valuation Ratios: What’s the Stock Really Worth?

Now this part gets interesting if you're into investing or thinking long-term.

• Price-to-Earnings (P/E) Ratio = Stock Price ÷ Earnings Per Share

  A high P/E might mean investors expect big growth. But sometimes, it's just hype.

• Earnings Per Share (EPS) = Net Income ÷ Shares

  The higher the EPS, the better. But don’t rely on it alone.

• Price-to-Book (P/B) Ratio = Price ÷ Book Value Per Share

  Good for checking if the company’s stock is over- or undervalued.

I once thought a company was undervalued because of its low P/B. But it turned out the assets weren’t all that useful (like outdated equipment). So yeah—context matters.

Okay, So How Do You Actually Use All This?

This is the part no one tells you: don’t just look at the numbers—track them over time. Pull data from the last 3 to 5 years. Plug it into a spreadsheet. Look at trends.

• Are the ratios improving?

• Are they staying flat?

• Or getting worse?

Also, always compare to other companies in the same industry. You can’t compare a tech startup to a construction company. That’s like comparing a kayak to a cruise ship.

And don’t ignore the “why.” A bad ratio isn’t always bad if there’s a good reason behind it—like heavy R&D investments or global expansion.

Final Thoughts: Ratios Are Tools, Not Answers

So yeah—analyzing financial ratios takes a bit of patience. But once you get the hang of it, it’s kind of empowering. You stop guessing and start understanding. You see behind the curtain.