financial ratio analysis
accounting
Also known as: ratio analysis
Quick Summary
Financial ratio analysis is a method used in business finance to evaluate a company's financial statements, such as the balance sheet. It involves calculating various ratios to understand the relative importance of different items and assess a firm's performance and financial health.1
Key types of financial ratios include:
- Liquidity Ratios: These measure a company's ability to meet its short-term obligations. Examples include the current ratio (current assets divided by current liabilities) and the quick ratio (which excludes inventories).12
- Financial Leverage Ratios: These assess the extent to which a company uses debt financing, such as the debt-to-asset ratio.1
- Activity Ratios: These indicate how intensively a company is using its assets, often by looking at turnover rates for inventories and accounts receivable.1
- Profit Ratios: These measure a company's success in generating profits relative to sales, assets, or net worth.1
Ratio analysis is valuable for comparing a company's performance against industry benchmarks, tracking trends over time, and anticipating potential financial problems.1
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