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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: tonychen2016 who wrote (64488)	8/5/2020 2:58:44 PM
From: bruwin	Read Replies (1) \| Respond to of 78666

Hi Tony ... You stated .... "But wouldn't it be useful to use ratios even if it has high variability if comparing within an industry to get a closer look at how the company's finances are in comparison to its competitors ?" If you want to study "Ratios" I'd say you should primarily be aware of what those ratios are actually telling you. My post that you referred to discussed the P/S ratio and the fact that "P" is very much a variable that can vary over relatively short periods of time, so one day it will give you "X", and then a week later it may give you "X+15%", and then maybe two week later it may give you "X-25%", etc..., as in ---> Each circled PRICE value would have given you a different value for P/S. I really fail to see the value in such a variable result. It certainly cannot tell you anything about the business performance of a company based on its Financial Fundamentals. If, as you say, you want to get "... a closer look at how the company's finances are ... " I'll give you two examples of ratios, which provide practical information, and are based on actual financial numbers taken from any company's Financial Statements where that company is selling a product or a service, etc... Any such company will have Two "Compulsory" expenses which it cannot avoid spending its Revenue on, namely CoS (or CoGS) and SG&A. Sometimes there'll be a Third, i.e. R&D. If you add those 3 together and subtract that total cost from a company's Total Revenue you get EBITDA. So a useful Ratio would be the percentage ratio, EBITDA/Revenue because that will tell you what percentage of a company's Total Revenue is left over after those 3 Compulsory Expenses are deducted .... the greater that percentage the better because it means that there's more Revenue heading down to the Bottom Line ..... and isn't that the Primary Aim of Any Business, to get the maximum amount of its Total Revenue down to the Bottom Line ? One could then put a percentage Target to that ratio and say that one would prefer to only consider investing in a company if that percentage target was above a certain number. A second example could be a ratio based on a company's Debt Expense. It may be the case that a company has a relatively high LTD/Equity ratio. But it may have arranged favourable terms to repay that debt. So the place to look with regard to how that debt is actually affecting the company's Bottom Line is the "Interest Expense" number on its Income Statement. A useful percentage ratio, IMO, is Interest Expense/EBITDA because that tells one how much of the Revenue left over at EBITDA is being chewed up by the company's Debt. The smaller that percentage is the better. But "one, or two, swallows don't make a summer" .... there are other percentage ratios that one could put together and give target numbers to. In that way one could have 4 or 5 financial ratios, taken from items from within a companies financial statements, that one would prefer that a company, preferably, simultaneously Meets or Exceeds. Because if that happens there's a very good chance that such a company will be performing well as a business. This aspect of Targeted Percentage Ratios forms an important part of Warren Buffett's investing strategy as you can see in that book I referred you to. I've listed those ratios in the header of my board at ..... Subject 56822