Enterprising Investor Forum

Understanding Ratios Friday, June 15, 2007

You have probably heard people saying that the common language of business is finance and therefore, when dealing with ratios, the most important are those that are financially based.

We plan to use this category to explain not only, how some of the key ratios are calculated but more importantly what they mean and how to interpret them. In our search for truly exceptional businesses that are currently trading at discounted prices, we have to be able to asses the business fundamentals: basically we are looking for value.

Assets, profits, growth and cash flow will be the inputs that will allow us to generate the ratios and enable us to determine this corporate value. However, please remember that this is only part of the equation, when trying to understand a business and future growth potential, we also have to consider key issues like management, competitive advantage and moats.

Stay tuned for our first post on Earnings per Share (EPS).