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Free online Course on Financial Ratio Analysis

Financial Ratio Analysis

 

Why use ratios

 

It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to work with and thus, you tend to operate in the dark. One way of establishing references and managing the financial affairs of an organization is to use ratios. Ratios are simply relationships between two financial balances or financial calculations. These relationships establish our references so we can understand how well we are performing financially. Ratios also extend our traditional way of measuring financial performance; i.e. relying on financial statements.

 

Financial ratios provide the analyst with a means for making meaningful comparison of a firm's financial data over time and with other firms.  Thus, financial ratios represent an attempt to standardize financial information in order to facilitate meaningful comparisons. Financial ratios help us identify some of the financial strengths and weaknesses of a company and help us compare the firm's performance to similar firms in the same industry.

 

We can use ratios to answer some important questions about a firm's operations.

 

 

   
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