Financial Ratios To Learn Stock Trading
June 29th, 2011 Filed under: Investing Tips — Investing Author
If you’re looking to learn stock trading you need to get a good understanding of how to analyze financial statements. Even if you get a trading platform that goes GREEN telling you when to buy and RED telling you when to sell you still need to dig deeper.
When you learn stock trading there’s a lot of different ratios that you’ll be reviewing to figure out how profitable a company is and its overall financial performance to see if you should get in the stock. Financial ratios help you to look in more detail how a company is really doing.
One of the more important measures is called the liquidity ratio (sometimes referred to as the current ratio) which simply measures the ability a company has to pay off all its short-term debt. The ratio is simply the total current assets of the company divided by their current liabilities. Usually the higher the ratio the better indicating that it shouldn’t have much trouble paying off their debts.
There are times however when it’s not always the case that a higher liquidity ratio is good. One must look at the bigger picture to understand this.
This ratio only looks at the value of the current assets which often includes working capital. But working capital isn’t a liquid asset. You can’t sell of your work. If a company has a big portion of working capital listed in their current assets, a company with a lower liquidity ratio but also low working capital might overall be more liquid.
If you take a closer look at what the actual assets are you can get a clearer picture of the true liquidity. Just like when you learn stock trading there’s platforms that tell you which stock you should investigate closer in, the same goes with these financial ratios. If you find a good stock with a good liquidity ratio than a little more investigating can greatly help you find the winners.
