Financial Ratios

Financial Statement Analysis and Financial Ratios

Applying financial ratios and accounting formulas to the financial statements can provide valuable insight into the company’s profitability, financial strength, and efficiency of operations.

Financial statement analysis can then be used to evaluate both the short-term and long-term prospects of the business.

Financial Reporting and Analysis and the Accounting Equation

The main accounting equation is the basis for financial reporting and analysis.

Assets = Liabilities + Owner’s Equity

From this accounting foundation, key aspects of the financial statements are produced and can also be analyzed to evaluate various aspects of the business.

Financial statement analysis measures key performance indicators of the business, most notably:

Financial Statement Analysis: Key Performance Indicators

1. Financial Condition and Liquidity

2. Management Efficiency

3. Profitability

4. Growth Rates

5. Investment Returns

The financial ratios below are categorized into the key performance indicators used to analyze the financial statements, as well as the main financial statement used with each financial ratio. Simply click on each link for the complete financial ratio analysis illustration.

Financial Ratios and Balance Sheet Analysis

1). Financial Condition and Liquidity

a). Short Term Financial Condition and Liquidity

Current Ratio

Quick Ratio

Working Capital

b). Long Term Financial Condition and Liquidity

Book Value

Debt Ratios

Debt Equity Ratio
Interest Coverage (Profit and Loss Statement)
Debt Coverage Ratio
Leverage Ratio

2). Management Efficiency

Accounts Receivable Turnover

Asset Turnover

Inventory Turnover

Financial Ratios and the Profit and Loss Statement

3). Profitability

Gross Profit Margin

Operating Margin

Net Profit Margin

4). Growth Rates

Sales

Net Income

5). Investment Returns

Return on Capital

Return on Equity

Return on Assets

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