Examining Four Key Types of Investment Ratios

To research possible investments, you read financial reports, prospectuses, and all manner of number- and jargon-filled analyses. Investors use different ratios to boil that information down into usable chunks to make sound investment decisions.

Before going too far with this discussion, it's important to understand the benefits and limitations of ratios. Ratios are great tools and bring understanding to key parts of the financial statements. But realize that they are just tools, not a substitute for practical judgment. Ratios won't automate your stock-picking decisions — they are a step along the way, not an "end-all" analysis tool.

With that caution in mind, examine the types of ratios, and, in a big-picture sense, how they're used in practice. Ratios can be classified into one of four categories largely defined by what you're testing for:

Asset productivity ratios: Assets are resources used in a business to produce a profit, or return. This group of ratios describes how effectively those assets are deployed or utilized. Some analysts call these efficiency or asset management ratios. How much inventory, accounts receivable, or fixed asset investment does it take to support a given volume of business? Are these assets being managed effectively with proper controls?

Financial strength ratios: Company resources are provided either by company owners (shareholders) or by creditors (debt holders or holders of other obligations). These ratios measure to what extent company resources are provided by sources other than the owners. Sometimes called liquidity or debt management ratios, these ratios are also used to assess the company's ability to pay its creditors and how vulnerable it may be to debt problems and high interest costs. They also describe financial or capital structure — that is, how financially leveraged a company may be.

Profitability ratios: How profitable is the company? Sure, there may be a lot of business activity. But how much profit is produced? Per dollar sold? Per dollar invested? Some analysts refer to these ratios as management effectiveness ratios because they indicate management's overall success in generating returns for the enterprise.

Valuation ratios: The first three ratio families examine internal business fundamentals. With valuation, the stock price enters the picture. Valuation ratios, as the name implies, relate a company's stock price to its performance. The ubiquitous price to earnings (P/E) ratio shows up here, as do its siblings price to sales (P/S), price to book (P/B), and a few others.

Adapted From: Value Investing For Dummies, 2nd Edition

Retirement Planning Checklist

Find the category that best describes you. After answering the questions, bring the list to a qualified financial professional who can help make sure your retirement plan is on target.Saving for Retirement

1. Have you performed a comprehensive retirement needs calculation?
2. Are you contributing enough to potentially reach your financial goal within your desired time frame, by maximizing contributions to tax-advantaged retirement accounts, such as your employer-sponsored retirement plan and an IRA?
3. Is your asset allocation aligned with your retirement goal, risk tolerance, and time horizon?
4. Have you determined if you might benefit from contributing to a traditional IRA or a Roth IRA?
5. Do you review your retirement portfolio each year and rebalance your asset allocation if necessary?

Nearing Retirement
1. Do you know the payout options available to you (e.g., annuity or lump sum) with your employer-sponsored retirement account, and have you reviewed the pros and cons of each option?
2. Have you considered your health insurance options, (i.e., Medicare and various Medigap supplemental plans or employer-sponsored health insurance), out-of-pocket medical expenses, and other related health care costs?
3. Have you contacted Social Security to make sure your benefit statement and relevant personal information are accurate?
4. Should you purchase long-term care insurance? If so, have you investigated which benefits are desirable?
5. Is your asset allocation properly adjusted to reflect your need to begin drawing income from your portfolio soon?
6. Have you determined an appropriate withdrawal rate of your assets to help ensure that your retirement money might last 20, 30, or more years?
7. Have you figured the amount of your annual required minimum distribution (RMD) and developed a strategy to reduce your tax burden once you're required to begin taking RMDs?
8. Have you appointed a health care proxy and durable power of attorney to take charge of your health and financial affairs if you are unable to do so?
9. Have you reviewed all your financial and legal documents to make sure beneficiaries are up-to-date?
10. Are you making effective use of estate planning tools (such as trusts or a gifting strategy) that could reduce your taxable estate and pass along more assets to your heirs while also benefiting you now?

Summary
Planning for retirement is a lifelong process. Determining your retirement needs by identifying your potential retirement expenses and sources of retirement income is an important step.
Starting to invest early for retirement and contributing as much as possible to tax-advantaged employer-sponsored retirement plans and IRAs are two ways to leverage your retirement dollars.

Determining an appropriate asset allocation -- how you divide your money among stocks, bonds, and cash -- is a time-tested strategy for helping you pursue your financial goal.

It's essential to determine an appropriate annual withdrawal rate of your assets during retirement so you don't outlive your money.

After age 70 1/2, you must begin making an annual required minimum distribution from certain tax-deferred retirement accounts. Preparing for this phase ahead of time may help reduce your tax burden.

Developing an appropriate estate plan is the important final stage of crafting an effective retirement plan.

Checklist
Try to accumulate enough emergency savings and insurance coverage so that you can address unexpected financial crises without spending money earmarked for retirement.
Update beneficiary designations on all retirement accounts and other financial paperwork.
Consider changing the date of your retirement if it would make it easier to retire with enough money for the future.
Rebalance your retirement account's asset allocation if necessary.

How consumers can cut their grocery bills

By Anne D'Innocenzio, AP Business Writer

Strategic shopping can help consumers lower their supermarket bills despite soaring prices
Q. The price of milk, rice and other food basics is soaring. How can I reduce my grocery bill while still providing my family with nutritious food?
A. With staples like milk now selling for almost $4 a gallon and the price of eggs at more than $2 per dozen, Americans' household budgets are being squeezed. And some analysts predict food inflation could double this year, lifted by the rising costs of fuel, corn and soybeans. But families can take steps to limit the impact of higher prices.

"Overall, you can control what you spend even in an environment where food prices are escalating fast," said Goutam Challagalla, associate dean and associate professor of marketing at Georgia Institute of Technology. "You can save without sacrificing quality."

First, Challagalla and other experts recommend that consumers make a list of food items the family needs before they go shopping and stick to it. Walking aimlessly up and down the aisles will encourage shoppers to pick up extra items like cookies and other munchies.
It's also a bad idea to go shopping when you're hungry. Consumers tend to be more impulsive, and pick up unnecessary items when they're shopping on an empty stomach.

Here are more tips to keep your food budget in check:
-- Buy store brands. The quality of store branded food items has improved dramatically in recent years, and many now compete with major national labels, according to Tod Marks, senior editor at Consumer Reports magazine. Some consumers may want to stick with name brand detergents or soaps, for example, but buying store brands for a broad array of products from fruit cups to cereals and pastas can save anywhere from 20 percent to 50 percent, Marks said.
-- Evaluate unit prices. Buying in bulk is traditionally more economically, but that's not always the case, Marks says. So he and other experts recommend shoppers look at the item's cost per unit, which is found on the shelf sticker next to the item. Marks added that when items go on sale, shoppers should always compare the cost per unit on both the big and small packages to see which is a better deal.
But experts also say shoppers should keep in mind how much their families are going to consume. It's not economical to buy a big bag of fruit if it's going to end up rotting in the refrigerator.
-- Compare prices of the same product in different areas of the store. "Where things are placed in a store can make a big difference," says Challagalla. For example, cheese is often cheaper in the dairy aisle than the deli because shoppers have to pay extra for it to be sliced.
-- Clip coupons. Shoppers should look through circulars for special deals, but Marks warns them not to assume that all items in a supermarket's weekly flyer are on sale. He noted that manufacturers could have paid to have the item featured.
-- Obtain a store card. These loyalty cards allow shoppers to get extra discounts on items without having to clip coupons.
-- Consider frozen foods. Frozen peas, fish and other items are cheaper than fresh because they have a longer shelf life.
"Anything that is perishable, shoppers are going to have to pay higher prices because stores have to build it into their (profit) margins," said Challagalla.
-- Ignore precut fruit or vegetables or other prepped items. While it's nice to have that pineapple cut up in chunks, that extra convenience costs money.
-- Avoid items displayed at the checkout counter. Stores feature single serving pies, cans of soda and other items at the checkout that are often more expensive, but can be tempting to shoppers, particularly hungry ones, Marks said.

On the Web: http://www.consumerreports.org