Ratios Made Simple: A beginner’s guide to the key financial ratios

A book review by James Faulkner of WatsHot.com

As an accountant, Robert Leach fcca, fippm, ACertCM has more letters after his name than he actually has in it. But don?t worry; Ratios Made Simple is exactly that.

Rather than look at a company?s accounts from an accountant?s perspective (not as facile as it sounds), Leach has made something of a name for himself as the investor?s accountant. One cannot analyse a company?s financial health without looking at the accounts; and one cannot analyse the accounts without using the relevant ratios. This book is therefore akin to an investor?s toolbox, providing the reader with an introductory yet valuable insight into the calculation and application of the most essential financial ratios, from price to earnings ratios and dividend cover, to return on equity and gearing.

This might sound silly, but I was relieved when I found the text in Ratios Made Simple to be large and generously spaced. Admittedly, mathematics is not my strong point, so the fact that the chapters are easily digestible in under an hour is a real positive from my perspective. However, knowing the sums is only half the job, as Leach points out: ?Knowing that the working capital ratio of a company is 1.3 tells you nothing about whether the company is a good investment or not.? The investor?s job is to extrapolate meaning from those numbers, by identifying trends, making comparisons and formulating an opinion.

This is where Leach really comes into his own. Being something of an investor himself, he not only knows his way around a balance sheet; he also knows what he?s looking for. Readers will find out how to spot the tell-tale signs that all may not be well at abc Plc, whilst also discovering some of the tricks of the trade companies use to flatter the numbers.

Ratios Made Simple is a great piece of kit to have lying around on your desk for reference (although veteran investors may prefer the slightly more in-depth Investor?s Guide to Understanding Accounts, which can also be bought from the Square Mile Bookstore) and it is undoubtedly a great piece of introductory material for novice investors.