When you read a company’s financial statements, you are confronted with an array of numbers. Financial ratios can help you fully understand what these numbers mean, and what sort of trading decisions you should be making based on them. Ratios can help you decide whether the stock of a company is cheap (undervalued or discounted) or too expensive (overvalued or trading at a premium to the value of the company), or if a company is financially healthy or headed for trouble.

These ratios are based on measurements of different fundamentals of a company, such as cash flow, debt, and profitability. They either compare these to one another, or to the company’s stock price. Some ratios are read as a percentage, while others are expressed as multiples of the company’s share price.

In addition to using ratios to analyze an individual company, you can use ratios to compare several companies in a given industry or compare companies in different stock market sectors in order to reach conclusions about asset allocation.

You can use these ratios on their own or in conjunction with each others to assist in making profitable trading decisions.