Value Investing

Ignoring Ratio Analysis Flaws

Earlier sections of this tutorial have discussed the calculation of various financial ratios that help investors diagnose a company’s financial health. There isn’t just one way to determine financial ratios, which can be fairly problematic. The following can affect how the ratios can be interpreted:

  • Ratios can be determined using before-tax or after-tax numbers.
  • Some ratios don’t give accurate results but lead to estimations.
  • Depending on how the term earnings are defined, a company’s earnings per share (EPS) may differ.
  • Comparing different companies by their ratios—even if the ratios are the same—may be difficult since companies have different accounting practices.

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