A stock may be in the news as a potential multibagger, or may be approaching its 25th or 50th year of existence or has a reputation of distributing large dividends.
Those may be good reasons for someone to buy the stock in the hope of making some quick gains. But for building wealth for the long-term, more detailed analysis is necessary to determine a company's staying power.
Ratio analysis is a good way to differentiate a company from its peers and competitors. But there are so many ratios to analyse - where should you start?
The state of financial health of a company is one of the first things you should evaluate. If the financial foundation is strong, many other shortcomings can be overridden.
Solvency ratios - like debt/equity and interest coverage - indicate the ability of a company to meet its long-term financial commitments.
Liquidity ratios - like current ratio and quick ratio - indicate how well a company can meet its short-term financial obligations.
To learn more about solvency and liquidity ratios - how to calculate and evaluate them - visit the following links at investopedia.com: