Financial Intelligence, Revised Edition

20

The Power of Ratios

The eyes may or may not be a window into the soul, as Immanuel Kant suggested, but ratios are definitely a window into a company’s financial statements. They offer a quick shortcut to understanding what the financials are saying.

There’s a classic story that illustrates this point very well. The year was 1997. The notorious “Chainsaw Al” Dunlap had recently become chief executive of Sunbeam, then an independent appliance maker. By the time he arrived at Sunbeam, Dunlap already had a great reputation on Wall Street and a standard modus operandi. He would show up at a troubled company, fire the management team, bring in his own people, and immediately start slashing expenses by closing down or selling factories and laying ...