This is Andrew Horowitz with The Winning Investor's Quick and Dirty Tips for Beating the Market. In the last episode, we covered the quick ratio, In this episode, we will discuss profit margin and debt ratios.

What is the Profit Margin?

So, what other major ratios should you be comparing? The bottom line for most companies is the "Profit Margin". It tells you how well management is turning revenue into earnings for shareholders, which would directly affects you as a potential investor. Long-term investors want their companies to give them a long trend of future cash and profits. Profits point to a company's long-term growth potential and "staying power!" Staying power is good because the more cash and profits a company is producing, the lower their risk of bankruptcy is. You don't want to invest in a company that could go bankrupt any time soon!

Companies with a history of steadily increasing profits and earnings generally are safer than those with more volatile histories. There's different ways to figure out the Profit Margin. You can take the net income reported and then divided it by Sales Revenue to see how much profit the company actually took home after their expenses were filtered out.

You can find some of this information at a great website - Finviz.com.

If a company has a higher Profit Margin that other competitors in its industry, then it might clue you in that the company either manages itself more effectively than other companies or has some sort of competitive advantage that might be attractive to you as an investor.

For example the profit margin for Coca-Cola is 17.85% and the profit margin for Pesi is 11.89% which shows, possibly that Coca-Cola is a better investment choice.

Debt Ratios

How else can you tell if a company your find interesting might be in trouble? You can look at their debt ratios, including their debt to total assets (debt divided by total assets) or debt to total capital ratios (debt divided by total capital). Ideally, you would want to select a company with a lower debt ratio, but that's not always the case. Sometimes a debt load can be good if the company is putting capital to good use. Think about how much debt Donald Trump's company has to take on to buy all those office buildings he owns! He owes a lot of money in liabilities, but as long as his buildings keep taking in rent and they keep appreciating over time, he'll continue to turn a profit if he's taking in more money per month and per year and so on. If he is taking in more money than paying out, that could be a sign of a profitable company. Sometimes you have to look deeper to see if a company actually is putting their debt and capital to good use. A company with higher debt might be more volatile in their earnings than one with a lower ratio. If you compare companies to each other in the same industry, higher ratios often warn of higher risk to investors.

It's hard to get a handle on what ratios are most important and which ones don't really give you all that much usable information. The quick and dirty tip is that you should be most interested in selecting companies with stronger ratios than their competitors, and there are tools that do all the work for you once you figure out what the ratios mean and why they're important. We'll be talking about some of these resources in upcoming podcasts. The easiest places to look will be sites like Yahoo Finance, MSN Money, Google Finance, and Finviz.com.

In the next episode we will discuss the all important P/E ratio and why that can help compare companies quickly to find profitable opportunities. For now, make sure to go to quickandditrytips.com for the the show notes to find tips on how to be profitable in the weeks ahead.