Ratio Analysis




METHODOLOGY

To produce the results within RatioAnalysis.net involved a number of steps.

Firstly, I sourced financial statement data for S&P500 stocks from SEC Filings, particularly the 10-K Filings.

The most efficient data source was via a private provider who both cleaned the individual data points and made it easy to download. Now when I say they "cleaned the individual data" I mean that they mapped the different ways every individual company labels particular data points into a respective group. For example, one company may file the 10-K's with the term 'Revenue', another may call it 'Sales' and yet another may call it 'Sales Revenue'. This private data provider used accounting rules to map 500 different financial statement formats into a single, standardised format.

Using their standardised format I downloaded all the data from the S&P that would allow me to calculate the different ratios.

When I had the data I personally (along with al lot of MS Excel cut and pasting) calculated all the ratios based on formulas that I was taught while studying accounting at university.

From here, I managed to build and populate the website with all the companies and ratio results, and from there we have RatioAnalysis.net.

READ ME

There are a couple of issues that I want to discuss in relation to the methodology just mentioned and the final RatioAnalysis.net output.

1) Not all companies reported in their 10-K Filings all the required data to calculate all the ratios.

Within the website you will come across missing ratio results that are generally defined as "#DIV/0". This is the output when MS Excel tries to divide by zero, as you are probably aware.

Now this can mean two things: (a) either the data point literally was zero, or (b) the company did not report that individual data point in their 10-K Filing. Here's an example, if I tried to calculate and upload the Times Interest Earned ratio and the output is "#DIV/0" then this means that the company had no interest expense at all OR it could mean that they didn't separately report 'Interest Expense' (perhaps they disclosed it in the Notes to the Financial Statements, which I didn't practically have access to, rather than report it in the actual income statement).

You may also find that some companies don't report particular data points based on their particular business model. For example, Netflix Inc. has '#DIV/0' for it's Inventory Turnover. But this is not because they didn't report inventory numbers, it's because under Netflix's business model they NEVER have inventory. This can be a valid explanation for many times the company didn't report all the required data to calculate all the ratios.

2) Some ratio results have been manipulated, by hand by me, because there was missing data.

Now 99% of the time I had access to all the data I need to calculate accurate ratios. But following on from the just mentioned explanation about missing reported data, if a ratio required 2-years worth of data points to calculate one ratio result and I only had access to 1-years worth of data I would change the ratio formula to allow using only 1-years worth of data.

For example, if a company was only listed in 2013 and thus had no data for 2012 then a calculation of the 2013 Return on Equity would require 'common stockholder equity' for 2013 & 2012. Since the missing 2012 data would result in a 'zero' being added to that particular calculation the 'average equity' for 2013 & 2012 would just be halved (specifically, the 2013 equity divided by two). As a result of this, in this example, I would have adjusted the Return on Equity formula to only calculate using only the 2013 common stockholder equity, which is still a valid formula but not strictly the one I use.

3) Many different people calculate ratios using many different formulas.

This is just a fact of ratio analysis. While the most popular and simple ratios have pretty standard formulas, you will find that many ratios have a variety of formulas that could be applied.

Whether one particular formula is more 'correct' than another is up for much debate, but usually the formula used by individuals is based on what they first learned or what is used at a workplace.

So, while I have used what I believe are strong & common formulas for these ratios, you might very find that your own formulas or someone else's would provide different ratio results than what is found in RatioAnalysis.net.

WARNING & DISCLAIMER

Based on what you have just read above in the 'Methodology' and 'Read Me' I just have a final warning and a legal disclaimer.

Warning

I have done my best to build a useful S&P500 investing guide based on ratio analysis. But this website is no substitute for your own research or specialised advice.

Ratio analysis, alone, should not be the sole factor you base an investment decision on. Ratio analysis should instead form only a part of a suite of research before you hand over your hard earned cash.

So don't bet the farm based on what you find in the website alone. Use it as education and as a point of reference to further, or focus, your own stock research after you leave RatioAnalysis.net and prior to investing.

Disclaimer

The material in this website (the “website”) and the information accessed through it is of a general nature only and does not contain investment recommendations or professional advice. The information is not to be relied upon as being accurate, complete or up to date. Axel Tracy & Bidi Capital Pty Ltd (the “publishers”) recommend that, before acting or not acting upon information contained or referred to in this website visitors should seek independent professional advice that takes into account their financial situation, investment objectives, particular needs and/or other personal circumstances. The information contained in this website is not to be used for any purpose other than educational purposes and it is not to be construed as an indication or prediction of future results from any investment. Axel Tracy & Bidi Capital Pty Ltd do not offer financial, business or academic advice. To the maximum extent permitted by law, the publishers disclaim all responsibility and liability to any person, arising from directly or indirectly from any person taking or not taking action based upon the information in this publication.






Want to know more about the Ratios used in the S&P500 stock calculations, including all formulas?
Check out their individual ratio pages via the main menu for Descriptions, Calculators & Formulas



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Keywords: Stock Market, Share Market, Ratio Analysis, Investing, Financial Statement Analysis, S&P Index, Dow Stock, Value Investing