Putting the Numbers to Work: The Magic of Ratios
Step 1: Is There an Easy Way to Use a Firm's Numbers to Judge Its Prospects?
Financial ratio analysis relies on financial statements to study the past and develop a feel for a company's attractiveness measured through factors such as its competitive position, financial strength, and profitability.
Classroom Steps
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Step 1:
Is There an Easy Way to Use a Firm's Numbers to Judge Its Prospects? -
Step 2:
How Do I Check on Whether a Company Is Using Its Assets Effectively? -
Step 3:
Which Ratios Put a Firm's Profits in Perspective for Me? -
Step 4:
How Can I Tell If a Firm Is at Risk for Financial Trouble? -
Step 5:
What Measures Show Whether a Firm Might Default on Its Debts?
Knowledge of financial ratios should give investors a feel for how a company might react to shifts in industry, financial, and economic environments.
We have selected some widely used ratios of interest to investors. The financial data used to illustrate the ratios is taken from a sample balance sheet and income statement.
As with all ratios, a comparison with other firms in similar industries is useful, and a comparison of these ratios for the same firm from period to period is important in pinpointing trends and changes. It is also important to keep in mind that these ratios are interrelated and should be examined together rather than independently.
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