The Keys to Successful Investing
Financial ratios are priceless tools that are critical when making decisions concerning investment. Investors make use of financial ratios when analyzing the performance of the organization before investing. These ratios disclose the way an organization is financed, the way it utilizes its resources, its ability to yield profits, and capacity to settle debts. Financial ratios offers a quick look at the position of an organization at a specific time, and are hence important when comparing the performance of the business across time periods. Ratios could also be used to examine the performance of other businesses in the same industry before investors invest in that business. Financial ratios don’t provide a complete picture of an investor’s investment potential, but they provide a wise start when analyzing a business. Some of the most important financial ratios that should be considered before investing include liquidity ratios, profitability ratios, and financial leverage ratios (Peterson & Peterson, 2008).
Liquidity ratios are used in measuring the capability of a business to settle its bills and obligations in due time. Most investors prefer specific liquidity ratios when making their investment decision. These ratios include current ratio and cash ratio. Investors also use the quick ratio in their decision making. These ratios are computed using different formulas, and the figures obtained are used to make investment decisions. For instance, in the computation of current asset ratio, a value of more than 1 indicates that the value of assets surpasses that of liabilities and vice-versa (Peterson & Peterson, 2008).
The ability of any business to make profits is measured by computing its profitability ratios which include gross profit margin, return on equity and return on assets. These profitability ratios are calculated by projecting the cash flows of the business. Investors would prefer higher values computed under profitability ratios. For instance, Return on assets discloses how well a business utilizes its assets to yield income, and hence investors would opt for higher returns as opposed to lower returns on assets.
Financial leverage ratios evaluate the relationship between debts and assets. Debt ratio is obtained by dividing total debt by total assets (Peterson & Peterson, 2008). A value of less than 1 signifies that a business has more debts than assets, and vice-versa. Investors with lower debts are better positioned to compete in the market than those with higher debts.
The accuracy of the numbers presented by financial ratios depends on certain aspects. A financial analyst has to ensure that the data he uses in computing these ratios is accurate before making his analysis. He should also ensure that the numbers obtained from the ratios are interpreted in the right context. Proper comparison of the ratios against other companies in the same industry should be conducted for accuracy and effectiveness of in the application of the ratios.
Product differentiation is essential for new products as makes them to be appealing to customers. Different methods can be used in product differentiation, and some of them include: adding functions or features to the product through product innovation, which can help in making a product unique and attractive. Product packaging is also of the essence when considering product differentiation (Beath & Katsoulacos, 2003). Changing the packaging of a product can be important as it lures customers to purchase the product, may be due to its attractiveness. Differentiating new products in terms of price is vital. It would be necessary to lower the prices of the new product for ease in market penetration. Another essential way of differentiating the product would be through partnering with providers of a complementary service or product, or using other competitive factors e.g. better locations, better appearance or design for the product.
The exit strategy for the business would involve becoming a passive owner but at the same time retaining ownership. There are several benefits associated with this method, which act as a trigger to its selection. This strategy would be essential in matters relating to the control of the business as a less active leader. The strategy provides a better transition in preparation for another exit strategy e.g. selling the business to key employees. As a passive owner, the risk losing income is minimized, but the culture and mission of the business is maintained.
Beath, J. & Katsoulacos, Y. S. (2003). The economic theory of product differentiation. Cambridge, England: Cambridge University Press.
Peterson, D. M. & Peterson, D. M. (2008). Financial ratios and investment results. Lexington, Mass.