Track 02 · Reading Financial Statements
The five numbers to check first
A short, repeatable ratio shortlist that takes two minutes and rules most companies in or out.
No ratio means anything alone. Compare the company against peers and against its own past — the same 12% can be weak or excellent depending on the industry.
- 1Widening gap. A margin climbing while peers sit flat is a trend worth understanding before you act on it.
- 2Shrinking margin. Falling margins with flat revenue often mean the growth is being bought with discounts.
Illustrative series. Five ratios — P/E, ROE, debt/equity, net margin, payout — cover most early risk; this is one of them in context.
Why a shortlist
Dozens of ratios exist, and checking all of them turns research into a chore you will abandon. Five cover most of the risk: valuation, profitability, leverage, safety and income.
They are a screening step rather than a verdict. A pass only means “worth reading further”, never “good investment”.
The five
Each one answers a single question quickly: is the price reasonable, is the business profitable, is it at risk from debt, does it keep its profit, and can it keep paying its dividend.
- P/E ratio: what you pay per dollar of earnings (valuation).
- Return on equity: how hard management works your capital (profitability).
- Debt to equity: how much of the business is borrowed (leverage).
- Net margin: how much of each dollar survives to profit (quality).
- Dividend payout ratio: how much of earnings is paid out (income sustainability).
Read them together and in context
A low P/E with high leverage and falling margins is cheap for a reason; a high P/E with rising margins and no debt may be expensive for a reason. No ratio stands alone.
Compare against the company’s own history and against two or three peers in the same industry: cross-industry comparisons of margin or leverage are close to meaningless.
Turn the shortlist into a filter
Once you can state your thresholds (“P/E under 25, ROE above 15%, debt/equity under 1”) you have written a screen, which is exactly what the quant screener runs across the whole market for you.
The remaining tracks teach you where those thresholds come from, so you are choosing them rather than copying them.
Three things to remember
- 01Five ratios (valuation, returns, leverage, margin, payout) cover most early risk.
- 02A ratio is a filter rather than a verdict; context and peers decide what it means.
- 03Written thresholds are a screen; run them across the market rather than one stock at a time.
Try it on live data
Tools on this site are for research and education. Nothing here is financial advice or a recommendation to buy or sell.