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4. Analyzing Company Fundamentals > Calculate Financial Strength Ratios

Calculate Financial Strength Ratios

Examine a company’s financial strength to avoid the 98-pound weaklings that can wreck your portfolio performance.

Examining a company’s financial statements isn’t a lot of fun (unless you’re an accountant or attorney general), but there’s plenty of worthwhile information to be derived from a closer look at the balance sheet and income statement. There’s no need for a lot of number crunching, though—a handful of ratios can give you a good snapshot of a company’s fiscal fitness.

Current Ratio

The most common test of a company’s financial strength is its current ratio (also called the working capital ratio). The current ratio, shown in Example 4-22, assesses a company’s ability to pay off debts that are due in the next twelve months from readily available assets, including cash on hand, accounts receivable, and inventory.


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