Tools of Fundamental Analysis

Financial Ratios are the main tool of fundamental Analysis. It includes the following ratios :-

1. Profitability Ratio 
2. Liquidity Ratio
3. Activity Ratio or Efficiency Ratio
4. Debt Ratio
5. Market ratio

1. Profitability Ratio :- Profitability ratio measures the company's use of its assets and control of its expenses to generate an acceptable rate of return. Company's Profitability can be measure on the basis of following factors:-

• Gross Margin
• Operating Margin
• Profit Margin
• Return on Equity
• Return on Investment
• Return on Assets
• Return on Net Assets

 Liquidity Ratio :- Liquidity Ratios measures the availability of cash to pay debt. Company's liquidity can be measure on the basis of following factors :-

• Current Ratio
• Quick Ratio
• Cash Ratio 
• Operation Cash Flow Ratio

Activity Ratio :- Activity Ratio measures how quickly a firm converts non-cash assets to cash assets or measures the effectiveness of the firms use of resources. Company's effectiveness can be measure on the basis of following factors :-

• Average Collection Period
• Daily Sales Outstanding Ratio
• Assets Turnover
• Stock Turnover Ratio
• Receivables Turnover Ratio
• Cash Conversion Cycle

 Debt Ratio :- Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage. Company's Debt Ratio can be measure on the basis of following factor :-

• Debt Ratio
• Debt to Equity Ratio

Market Ratio :- Market ratios measure investor response to owning a company's stock and also the cost of issuing stock. Company's Market factor can be measure on the basis of following factor :-

• Earning Per Share
• Payout Ratio
• P/E Ratio
• Dividend Yield 
• Price/Cash Flow Ratio
• Price to Book Value Ratio
• Price/Sales Ratio

So we saw the overview of different types of ratios which is used to measure the Company's Profitability, Liquidity, Efficiency, Debt & Market factor. From the next post we will see individually each and how these are helpful to analyze the stock fundamentally.