Painting the corporate picture

Monday, 01 October 2012
The basics of investment ratios and how they can be used to assess companies.

The ratio analysis question in the Diploma 4 examination often creates dread in the minds of those without an accounting background. This need not be so. Consider these abbreviated specimen company accounts. We want to assess, using ratios, whether our trust ought to invest in this company.

Our investigation will focus on just some of the many ratios that could be used. In addition, we need to know that the share price of Steppex Manufacturing Ltd is now GBP2, and we are given the comparative ratios for all companies in Steppex’s industry and sector.

Conclusion

Steppex appears satisfactory, but the low PE needs investigating. Does the market know something we don’t in terms of poor expected results? In other words, has the share price reduced significantly because of an expected downturn in the company’s fortunes?

Author block
Right
John Harper

John Harper TEP is a part-time lecturer, delivering face-to-face courses for the STEP international diploma examinations all around the world.

Section
STEP Journal

The content displayed here is subject to our disclaimer. Read more