Financial Ratios Decision Tree Explained

The technique is excellent for illustrating the structure of investment decisions, and it can be crucial in the evaluation of investment opportunities. Decision Trees in financial analysis are a Net Present Value (NPV) calculation that incorporates different future scenarios based on how likely they are to occur.

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet

It is important to note that Decision Tree analysis does not provide an answer to which discount rate to use. We usually discount the branches using the Weighted Average Cost of Capital (WACC) of the company, as it shows the blended cost of capital across all sources, both equity and debt.

Financial Ratios Decision Tree Explained