Preferred Shares: An Introduction
Whenever the topic of fixed income securities is considered, the obvious assumption many investors make is that the conversation is about bonds. It is true that bonds are the most commonly traded types of fixed-income securities. However, they are not the only type of fixed-income securities. Preferred shares are another common type of fixed income […]
Concept of Profit Booking and How It Affects Stock Markets
If you have regularly observed the stock market, you may have noticed that a lot of time when the market falls, experts attribute this fall to profit booking. The concept of profit booking is known to a lot of people. However, the knowledge is merely superficial. In this article, we will have a closer look […]
Merchant Cash Advance
The commercial banking system has undergone a high deal of innovation in the past few years. A lot of new commercial lending products have been introduced in order to help business manage their finances better. A merchant cash advance is an example of one such innovative credit product introduced by the banks. In this article, […]
Problems Related to Facebook, WhatsApp, and Instagram Mega Merger
In the previous article, we talked about Facebook’s plan of becoming a social media conglomerate by merging different apps like Facebook, WhatsApp, and Instagram. We also spoke about the enormous economic benefits that Facebook as a corporation will derive from the merger of these diverse apps. However, for the moment, it does not seem like […]
Advantages of Title Sponsorship
In the previous article, we have already understood the meaning of title sponsorship. We also know why it is one of the most coveted forms of sponsorships. We are aware of some of the prominent disadvantages associated with title sponsorship. However, it needs to be understood that there are more advantages to title sponsorship as […]
Ratio, as the name suggests, is nothing more than one number divided by the other. However, they become useful when they are put in some sort of context. This means that when an analysts looks at the number resulting out of a ratio calculation he/she must have a reasonable basis to compare it with. Only when the analyst looks at the number and compares it what the ideal state of affairs should be like, do the numbers become powerful tool of management and financial analysis.
Dividing numbers and obtaining ratios is therefore not the main skill. In fact this part can be automated and done by the computer. Companies wouldn’t want to pay analysts for doing simple division, would they?. The real skill lies in being able to interpret these numbers. Here are some common techniques used in the interpretation of these numbers.
Horizontal analysis is an industry jargon for comparison of the same ratio over time. Once a ratio is calculated, it is compared with what the value was in the previous quarter, the previous years, or many years in case the analyst is trying to make a trend. This provides more information of two grounds. They are:
Cross sectional ratio analysis is the industry jargon used to denote comparison of ratios with other companies. The other companies may or may not belong to the same industry. Cross sectional analysis helps an analyst understand how well a company is performing relative to its peers. In a way this removes the effect of business cycles. There are many variations of cross sectional analysis. They are as follows:
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