How to Use Profitability Ratios to Make Investment Decisions

When considering a company as a prospective investment you should review its financial statements. Pay particular attention to the profitability ratios. If you can, calculate the ratios for the same company over several successive years to see if the company earnings are consistent, growing, or declining.

Compare your candidate’s ratios to other companies in the same industry. This will help you determine where your candidate stands in the industry.

Do not ignore other financial information on the profit and loss statement and balance sheet. Pay particular attention to losses in income items.