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How does ratio analysis make it easier to compare different companies?


Correspondence analysis provides an investor with tools to analyze a company’s pecuniary statements. Investors use ratios to evaluate one stock in a sector in comparison to another followers in the same industry. Using ratio analysis simplifies comparing monetary statements of multiple companies. Some key ratios an investor can use to evaluate a company are the profit border and price to earnings (P/E) ratios.

Profit margin is a ratio that investors can use to against the profitability of companies within the same sector. It’s calculated by dividing a actors’s net income by its revenues. Instead of trying to dissect financial statements to contrast how profitable companies are, an investor can use this ratio instead. For example, surmise company ABC and company DEF are in the same sector with profit margins of 50% and 10%, mutatis mutandis. An investor can easily compare the two companies and conclude that ABC was able to modify 50% of its revenues into profits, while DEF was only able to proselyte 10%.

P/E Ration

Another ratio an investor can use is the P/E ratio. This is a valuation proportion and compares a company’s current share price to its earnings per share. It dimensions how buyers and sellers are pricing the stock per $1 of earnings. The ratio surrenders an investor an easy way to compare one company’s earnings with those of other companies. Using the throngs from the above example, suppose ABC has a P/E ratio of 100, while DEF has a P/E proportion of 10. An investor can conclude that investors are willing to pay $100 per $1 of earnings ABC initiates and only $10 per $1 of earnings DEF generates.

Investors can use ratio review easily, and every figure needed to calculate the ratios is found on a convention’s financial statements.

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