Financial Statement Analysis - Ratio Analysis

Financial analysts commonly use financial ratios to evaluate the investment worthiness of a company’s equity or debt.  Ratio analysis is commonly done in comparison to other companies of similar industry.

When analyzing financial ratios, the analyst should consider the values in the context of the business cycle, trends, and industry or competitor standards.

5 Ratio Categories

Activity Ratios

Activity ratios measure the efficiency in which management runs the company.

Activity Ratio Examples: Receivables turnover, inventory turnover, payables turnover, fixed asset turnover, and total asset turnover.

Liquidity Ratios

Measure the company’s capacity to meet its short-term financial commitments.

Liquidity Ratio Examples: quick ratio (also called acid test ratio), cash ratio, defensive interval ratio, and cash conversion cycle.

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