Insights on Robert Kiyosaki’s Guide to Investing – Chapter 38

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I cannot believe what is this I am doing. I am already on the 38th Chapter of the book and still writing. This chapter now deals with “Analyzing Investments”. Something that every aspiring investor should know.

Just to confess, this chapter got me bored. It brings back the memories of my life as an Accountancy student. The ratios and formulas illustrated on this chapter is something that I already know. I know they by theory I must say, but I don’t know them by heart. And good investors know them by heart or asks a consultant to provide them with the ratios.

The author discussed only a few ratios in the chapter. I would not discuss those one by one but rather educate you, my readers on how the ratios help the investor. Those financial ratios can easily be provided by our reliable friend Google, but their roles and usefulness is something that only a few tell.

Whenever provided for by a financial statement, everyone would love to look at the results of operations or the profit or loss statement, because it depicts the performance of the business. Followed by the balance sheet that the only thing investors would be concern of is the assets. The financial ratios are not even provided for by the financial statements and that is why investing becomes risky.

The ratios help the investor to identify potential weak spots, problems and red flags that he should look out for. There are a lot of businesses that reports an attractive net income but if the ratios will be used, it unmasks the unreported story of the business. Once an investor or outsider learns how to unmask every business he get in touch with, it would be easy to identify which business would really be profitable in the future.

The thing to watch out for in using ratios is we tend to fail to look at the people who run the business. There are businesses that are operating good on paper that even using ratios would not unmask the decisions taken by management that would have significant effect on the business. Thus, ratios would not be enough but also perception. As an investor, we should look out also what is happening inside the business through the news and current events available, much better if you have a friend or someone inside the organization itself and ask him about his experiences with the firm.

Financial ratios is something to be analyzed on and something that must be a guide but we should not rely on it entirely for there are things that the financial statements and the ratios would not be able to tell. Knowing them is an advantage for it reduce risks of loss but it does not eliminate the loss. Every investments has its risks and rewards, thus, one must learn and analyze everything before deciding.

NOTE: IF YOU MISSED THE EARLIER CHAPTERS HERE ARE THE LINKS:
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