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An Introduction to Financial Ratios |
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Financial statement analysis is also referred to as ‘Quantitative Analysis’. It is one of the most important steps while analyzing a company from an investment perspective. Massive amounts of numbers in a financial statement may be bewildering and intimidating to a novice investor. Financial ratio analysis enables an investor to understand these numbers in an organized fashion. Balance sheet, Income Statement and Cash Flow Statements are the most important financial statements and if properly analyzed and interpreted can provide valuable insights into a company’s performance.
Financial ratios are used by current and potential investors, creditors and financial institutions to identify strengths and weaknesses of a business and to justify investments in the business. Internally, managers use these ratios to monitor performance and to set specific goals, objectives, and policy initiatives. The following articles discuss some of the important financial ratios used in determining the value of investments. It also discusses the limitations of these ratios which every analyst should bear in mind before interpreting these ratios. Financial Ratio Analysis Financial ratio analysis is a study of ratios between various items in financial statements. It enables investors and analysts to spot trends in a business and to compare its performance with the average performance of similar businesses in the same industry. Ratios can be classified as profitability ratios, liquidity ratios, asset utilization ratios, leverage ratios and valuation ratios based on the indications they provide.
Profitability Ratios
Asset Ratios
Liquidity Ratios
Financial Leverage Ratios
Valuation Ratios
The Limitations of Financial Ratios |
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