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Financial Analysis

Managers use financial statements to monitor their own company's performance, to help understand the policies of a competitor, and to check on the financial health of customers. But there is a danger of being overwhelmed by the sheer volume of data in the company's Annual Report. 18 That is why managers use a few salient ratios to summarize the firm's market valuation, profitability, efficiency, capital structure, and liquidity. We have described some of the more popular financial ratios.

We offer the following general advice to users of these ratios:

  1. Financial ratios seldom provide answers, but they do help you to ask the right questions.
  2. There is no international standard for financial ratios. A little thought and common sense are worth far more than blind application of formulas.
  3. You need a benchmark for assessing a company's financial position. It is generally useful to compare the company's current financial ratios with the equivalent ratios in the past and with the ratios of other firms in the same business.

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