Ratio Analysis

Financial statements report a business’s position at a point in time and its performance over a period. The value of financial reports, are the insights they give into the business and its future. Management use reports to help in planning future operations. Investors use them to predict future performance. Ratios are a powerful tool of quantitative analysis used in interpreting a business’s financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, and the industry to judge the performance of the business.

Liquidity Ratios

Liquidity ratios are used to determine a business’s ability to pay its short-term debt obligations; generally, the higher the ratio the better. A business’s ability to turn short-term assets into cash is important to entities dispensing short term credit, like suppliers. Liquidity Ratios

Activity Ratios

Activity ratios measure a business’s ability to convert assets into revenue. They are used to measure the relative efficiency of a business at using its assets. Activity ratios are important in determining whether management is doing good job of generating revenue from its resources. Activity Ratios

Profitability Ratios

Profitability ratios are used to assess a business’s ability at earnings compared to expenses. A higher ratio is generally better. Profitability ratios are popular in financial analysis, as a higher ratio gives a business considerable advantage against pricing pressures. Profitability Ratios

Coverage Ratios

Coverage ratios measure a business’s ability to meet its long term financial obligations. Bond investors are deeply interested in a business’s coverage ratios, as would long term equity investors. Coverage Ratios