Tools of the trade — 3 ratios to help you size up borrowers

Description

Abstract: Financial ratios can be an excellent tool for pinpointing businesses that deserve credit. One popular ratio, return on equity, or ROE, shows how much a company earns for each dollar its owners have invested. But lenders who conduct DuPont analyses gain additional insight by expanding this classic measurement into three underlying components: profit margin, total asset turnover ratio, and a comparison of total assets to equity. This article shows how, even with their limitations, ratios can be a highly useful analytical tool.