Investing based on ratios, like any other approach, has its pros and cons. The pro is that it is largely immune to subjectivity (assuming proper bookkeeping...); the con is that cross-company comparisons can be difficult because different industries can have radically different typical ratios.
I think that ratio analysis can serve two useful purposes:
* Detecting funny buggers. One or more ratios will often becomes skewed out of band when somebody is being creative with bookkeeping.
* Reality checking. This is a more general case of detecting funny buggers.
Finally, active share traders won't calculate purely on NPV, cash per share, etc. They'll be looking at share price growth and other shares may seem more attractive, for various reasons good or bad, regardless of the fundamentals.
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I misread you, then.
Investing based on ratios, like any other approach, has its pros and cons. The pro is that it is largely immune to subjectivity (assuming proper bookkeeping...); the con is that cross-company comparisons can be difficult because different industries can have radically different typical ratios.
I think that ratio analysis can serve two useful purposes:
* Detecting funny buggers. One or more ratios will often becomes skewed out of band when somebody is being creative with bookkeeping. * Reality checking. This is a more general case of detecting funny buggers.
Finally, active share traders won't calculate purely on NPV, cash per share, etc. They'll be looking at share price growth and other shares may seem more attractive, for various reasons good or bad, regardless of the fundamentals.