Investing and Numbers:

Over the years, Man (“investor”) has always had a decision regarding investing in enterprises, company or even in a venture; there are usually many options to be considered. In deciding, several factors are looked into, such as capital appreciation, affiliation (self-actualization), Personal reasons and many more; In determining these factors, the understanding of financial information (“Numbers”) is very important and helps to decide the potentials of an investment.

One of the courses in the Business Administration Program (MBA) of Lagos Business School (LBS) is Corporate Financial Reporting. This Course takes a deep dive into investment analysis and Ratios. It highlights the importance of analyzing the numbers of various companies using ratios to determine the most profitable company to invest in.

To analysis the numbers, some of the important ratios to consider are:

1. Profitability ratios: This looks at the ability of the Company to generate profit and create value for the shareholders; some of the ratios to be considered are Gross profit ratios; Operating profit ratios; Net profit ratios. The Company with the highest profitability ratios is usually favored.
2. Liquidity rations: this review the ability of the Company to pay it short term obligations; there are three major ratios; current ratios, quick ratios, and cash ratios; The assumption here is to invest in a company with a current ratio of 1:1.
3. Efficiency ratios: This is focused on how well the Company’s resources are used to create value for the owners. Examples are inventory turnover ratio, asset turnover ratio and receivable turnover ratios; the idea here is if the Company is efficient, the ratios would be high.
4. Solvency ratio: this ratio examines the Company’s ability to meet it long-term obligations; some of the ratios used include; the equity ratios; debt to asset ratios; debt to equity ratios. The investors want assurance that the Company can meet the long-term obligations when they become due.
5. Coverage ratios: This focuses on the company’s ability to services its debt and meet its financial obligations; the higher the coverage ratios, the better as this implies the Company would be able to meet its obligations.

The knowledge of ratios and its implications has been a very useful tool for investors. The investor would usually rely on the advice of the financial analyst but in most cases would do some analysis of their own to comprehend the risk and the upside of the investment. This shows the importance of being financial literate or knowing your numbers when it comes to investing; However, in most cases other information may be used to corroborate the numbers presented to ensure all the circumstances has been considered. At the ended of the decision-making process, the number are used to compute a valuation of the Company which would be accepted by both parties (the Investor and Investee), hence the use of financial statement (Numbers) cannot be overemphasized.