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Financial ratio analysis is a powerful tool to use when researching possible investments. Financial ratio analysis is the calculation and comparison of ratios derived from the information in a company's financial statements. Often the best way to use financial ratios is by using them as a trending analysis tool. From these financial ratio analysis calculations we can find such information as the health of the company, how it compares to others in its industry, and the attractiveness of the company as an investment.            

Anyone is able to conduct financial ratio analyis on a stock or company, all you need is the balance sheet and income statement of the company and the formula for that particular calculation. The availability of financial statements in today's era makes financial ratio analysis very practical for all investors.

When working with financial ratios to find the best investment, it is a good idea to find a website such as morningstar where you are able to view the trends of the different financial ratios of a company. Trends inside a company are of utmost importance in understanding what is going on financially. For example, here is a look at AAPL through morningstar's profitability ratios at the company for the past ten years. We can see that the company has done a lot to improve its return on equity and return on assets, which at least partly explains the huge rise in its stock price. It is also a good idea to use sites such as Google Finance or Yahoo Finance to find the average industry ratios, so that you can compare this particular investment to the industry average. This is a good way to view the relative strength or weakness of the company.

I will be revisiting financial ratio analysis over the next few months, taking a look at the individual types of ratios: how they are calculated, and what it means to you when looking for a stock. I will cover liquidity ratios, activity ratios, profitability ratios, and debt ratios. Let's learn about financial ratios and make our stock picking process more sound!