This last section of the ratio analysis tutorial looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.
However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation.
For example, the most well-known investment valuation ratio is the P/E ratio, which compares the current price of company’s shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market.
The first part of this tutorial gives a great overview of “per share” data and the major considerations that one should be aware of when using these ratios. The rest of this section covers the various valuation tools that can help you determine if that stock you are interested in is looking under or overvalued.
To find the data used in the examples in this section, please see the Securities and Exchange Commission’s website to view the 2005 Annual Statement of Zimmer Holdings.