Three Key Ratios For Investors

if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I’ll take my shot at it, what would you pick?

1) Current Ratio

Current Assets / Current Liabilities

Why?

This ratio keeps track of the company’s ability to pay its short term debt. If a company doesn’t have safety money to deal with debt then they might not be in business tomorrow and I don’t need any of that.

2) Dividend Yield

Annual Dividend Per Share / Price Per Share
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Red Flags: Intangibles

I very much dislike intangible assets, the growth or continued presence of them on a balance sheet always throws up a red flag for me. Maybe it is due to my value investor perspective but giving financial credence to a resource that I can’t see, can’t touch and can’t prove generated a cent of revenue in a business is something I just don’t like.

Definition

An asset that is not physical in nature. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today’s marketplace.
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Income Statement – Efficient Businesses

An efficient businesses is agile; not burdened by the overhead of paying for components that don’t add any value to the bottom line. The more lean and efficient a business the more options that business has open to it in terms of controlling its future.

If a business is able to produce a product for $1 and sell it for $5 while its competitor can produce the same product for $3 this efficient business has two wonderful options:
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1. Driving the competitor out of business by pushing retail lower say to $2. The business is still profiting meanwhile its competition is loosing massive amounts of capital if it wants to stay competitive.

The Balance Sheet: Goodwill

To understand a balance sheet requires that we understand every line item, what each means, and how it can be manipulated. Today we are going to look at the line item for Goodwill.

Goodwill Definition

Goodwill is one of the most commonly misunderstood line items in the balance sheet, I once met a junior investor who thought that Goodwill was the amount of money that the company had donated to charitable organizations. This unfortunately is not the case, goodwill, simply put, is the byproduct of two companies merging.
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