Chapter 23

Ratio analysis

How do you know if a firm is doing well, is an industry leader, or if it can meet its debt obligations? Ratio analysis is a form of financial statement analysis that is used to obtain a quick indication of a firm’s financial performance in several key areas.

When to use it

  • To compare a firm’s financial performance with industry averages.
  • To see how a firm’s performance in certain areas is changing over time.
  • To assess a firm’s financial viability – whether it can cover its debts.


The first cases of financial statement analysis can be traced back to the industrialisation of the USA in the second half of the nineteenth century. In this era, banks became increasingly aware of the risks of lending money to ...

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