How else can you tell if a company your find interesting might be in trouble? You can look at their debt ratios, including their debt to total assets (debt divided by total assets) or debt to total capital ratios (debt divided by total capital).
Ideally, you would want to select a company with a lower debt ratio, but that's not always the case. Sometimes a debt load can be good if the company is putting capital to good use.
Sometimes you have to look deeper to see if a company actually is putting their debt and capital to good use. A company with higher debt might be more volatile in their earnings than one with a lower ratio. If you compare companies to each other in the same industry, higher ratios often warn of higher risk to investors.
P
rofit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.
The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning.
A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.
For example, a company produces a loaf of bread and sells it for €10. It cost the company €6 to produce the bread and it also had to pay an additional €2 in tax.
That makes the company's net income €2 (10 minus 6, before tax, then minus 2 for tax). Since its revenue is €10, the profit margin would be (2 / 10) or 20%.
Profit margin is an indicator of a company's pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause the profit margin to vary among different companies.
from wikipedia
P
rofit margin is a measure of profitability. It is calculated as
and expressed as a percentage.
So, what other major ratios should you be comparing? The bottom line for most companies is the "Profit Margin(利润率)". It tells you how well management is turning revenue into earnings for shareholders, which would directly affects you as a potential investor.
Long-term investors want their companies to give them a long trend of future cash and profits. Profits point to a company's long-term growth potential and "staying power!" Staying power is good because the more cash and profits a company is producing, the lower their risk of bankruptcy is. You don't want to invest in a company that could go bankrupt any time soon!
Companies with a history of steadily increasing profits and earnings generally are safer than those with more volatile histories. There's different ways to figure out the Profit Margin. You can take the net income (净收入)reported and then divided it by Sales Revenue(销售收入) to see how much profit the company actually took home after their expenses were filtered out.
You can find some of this information at a great website - Finviz.com.
If a company has a higher Profit Margin that other competitors in its industry, then it might clue you in that the company either manages itself more effectively than other companies or has some sort of competitive advantage that might be attractive to you as an investor.
For example the profit margin for Coca-Cola is 17.85% and the profit margin for Pesi is 11.89% which shows, possibly that Coca-Cola is a better investment choice.
A
ratio of one means that a company’s assets and liabilities are equal.
If the ratio is less than one, it’s considered a low ratio. A low ratio might mean that a company is in trouble and might not be able to meet its obligations in a difficult environment.
A ratio greater than one is considered a high ratio and means a company has more assets than liabilities, which could mean they're more attractive than a company with a lower ratio.
A company’s high ratio may indicate that a company is in a good position to survive hardship because of all its valuable assets and so it might be a better investment than a company with a lower ratio.
A reading that is too low might mean that a company is in trouble and might not be able to meet its obligations in a difficult environment.
A low ratio doesn’t always indicate a company is in trouble, and a high ratio doesn’t necessarily mean a company is safe from trouble.
R
atios divide one thing by another. The easiest ratio to study - and one of the best indicators of a company's success and competitive edge - would be a ratio that divides the company's assets by their liabilities.
An Asset（资产） is something that a company owns that has value, like land, inventory, equipment, products, accounts receivable, stocks, and bonds. Some companies have intangible assets that give them a competitive advantage but are difficult to put an exact price on, like trademarks, patents, and copyrights.
On the other hand, a Liability(负债) refers to the debt a company has. Liabilities include obligations a company owes to other companies or shareholders, like loans, accounts payable, company bonds they have sold, and other assorted debts. Liabilities aren't necessarily bad -- after all, it takes money to make money!
So, the Assets to Liabilities ratio is usually the first thing an investor wants to know. It can quickly tell you if a company might be in financial trouble, and will also indicate which companies might be better positioned to weather difficult financial storms.
F
inancial Ratios（比率 ）When investors study a company, they often look at different financial ratios to see if they can figure out new trends of growth or see if a company might be struggling in some way. They are trying to study the company's past financial statements to get a feel for a company's attractiveness through looking at certain concrete facts: a company's financial health, its competitive position, how it uses its money, what kind of investment return the company gets, and finally how profitable a company might be relative to peers.
Ratios Help You Compare Companies
If you know about company ratios, you can compare different companies to each other using apples to apples comparisons. This can therefore help you make better investment decisions. All companies have revenue, assets, liabilities, debt and other components you can use to figure out ratios that will allow you to see if they're doing better or worse than their competitors or other companies in a different industry. You can also use these ratios to see which companies are more prepared to adjust in a changing economic environment.