02-09-2017, 11:33 AM
A relationship analysis is a quantitative analysis of the information contained in a company's financial statements. The proportion analysis is based on individual financial statement items such as the balance sheet, the income statement and the statement of cash flows; the relationships of an element - or a combination of elements - are calculated with another element or combination. The proportion analysis is used to evaluate various aspects of a company's operating and financial performance, such as its efficiency, liquidity, profitability and solvency. The tendency of these relationships over time is studied to see if they are improving or deteriorating. Relationships are also compared between different companies in the same industry to see how they accumulate and to get an idea of comparative valuations. The analysis of proportion is a cornerstone of fundamental analysis.
Proportion analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical criterion that provides a measure of the relationship between two variables or numbers. While there are numerous financial reasons, most investors are familiar with some key reasons, particularly those that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, debt-to-equity ratio, dividend ratio and price-earnings ratio (P / E).
For a specific proportion, most companies have values that fall within a certain range. A company whose relationship falls out of range can be considered as very undervalued or overvalued, depending on the relationship.
For example, if the average P / E ratio of all companies in the S & P 500 index is 20, and most companies have a P / E between 15 and 25, an action with a single digit P / E would be considered undervalued, while one with a P / E of 50 would be considered overvalued. Of course, this relationship would normally only be considered as a starting point, with additional analysis necessary to identify whether these stocks are actually undervalued or overvalued as suggested by the P / E ratios.
In addition, ratios are usually only comparable between companies in the same industry, since an acceptable ratio in one industry may be considered too high in another. For example, firms in sectors such as utilities tend to have a high debt-to-equity ratio, but a similar proportion for a technology company can be considered unsustainably high.
The proportion analysis may provide an early warning of a possible improvement or deterioration in the financial situation or the performance of a company. Analysts are engaged in a large number of crunching financial data in a company's quarterly financial reports for any suggestion.
Successful companies tend to have strong indices in all areas, and any sign of weakness in an area can trigger a meaningful sale in stock. Some ratios are carefully considered because of their importance for a particular sector, such as inventory sales volume for the retail sector and DSOs for technology companies.
Proportion analysis is the process of determining and interpreting numerical relationships based on financial statements. A ratio is a statistical criterion that provides a measure of the relationship between two variables or numbers. While there are numerous financial reasons, most investors are familiar with some key reasons, particularly those that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, debt-to-equity ratio, dividend ratio and price-earnings ratio (P / E).
For a specific proportion, most companies have values that fall within a certain range. A company whose relationship falls out of range can be considered as very undervalued or overvalued, depending on the relationship.
For example, if the average P / E ratio of all companies in the S & P 500 index is 20, and most companies have a P / E between 15 and 25, an action with a single digit P / E would be considered undervalued, while one with a P / E of 50 would be considered overvalued. Of course, this relationship would normally only be considered as a starting point, with additional analysis necessary to identify whether these stocks are actually undervalued or overvalued as suggested by the P / E ratios.
In addition, ratios are usually only comparable between companies in the same industry, since an acceptable ratio in one industry may be considered too high in another. For example, firms in sectors such as utilities tend to have a high debt-to-equity ratio, but a similar proportion for a technology company can be considered unsustainably high.
The proportion analysis may provide an early warning of a possible improvement or deterioration in the financial situation or the performance of a company. Analysts are engaged in a large number of crunching financial data in a company's quarterly financial reports for any suggestion.
Successful companies tend to have strong indices in all areas, and any sign of weakness in an area can trigger a meaningful sale in stock. Some ratios are carefully considered because of their importance for a particular sector, such as inventory sales volume for the retail sector and DSOs for technology companies.