Finance Primer: When we buy a mutual fund, it is diversified and managed.

Finance Primer: When we buy a mutual fund, it is diversified and managed. So we do not have to worry about it going bankrupt. When we buy an individual stock, that company has the possibility to go bankrupt. It is especially scary if the price is dropping and we don't know what is happening. Analysts use finance to help protect their investments in individual stocks. See? That’s easy right?

In finance, they look at ratios to determine the health of a company and protect against the possibility of bankruptcy. They look at the income statement and the balance sheet. From the balance sheet they look at assets and liabilities. Assets/ liabilities is often 1.0 to 3.0. It shows that the company has the ability to pay their bills form the assets that they have. The quick ratio is current assets/ liabilities. It shows the ability to pay the bills form assets that are liquid (cash) or easily (or quickly) convertible into cash/ but the balance sheet only shows one point in time. It is like a photograph of the company. it is calculated at the end of their fiscal year.

The income statement tells more about the company's ability to pay their bills over a period of time. For example, net income/ liabilities shows the ability to pay the bills from income.

The problem with performing ratio analysis is that you need to get the financial statements and read them. Most of the time, we don’t like to do that. But if we don’t do it, we don’t know, unless we can find an analyst who has done it, or we can get their summary. Maybe Morningstar ratings would be helpful. I have not used them that much because I am holding mostly mutual funds. But I can check into that.