Business Financial Information Secrets

CHAPTER 8Basic Financial Ratio Analysis and Terminology

PURPOSE AND STANDARD TERMINOLOGY

Whether from an internal or external perspective, financial ratio analysis represents an invaluable tool to help assess how a company is performing financially. External parties rely heavily on completing detailed financial ratio analyses to evaluate the economic performance of a company but often deal with two limiting factors. First, external parties generally can only complete their analyses on an annual or quarterly basis (when financial reports are issued). Second, and more importantly, external parties do not have access to the same amount of confidential or detailed financial information as internal management (which enables internal management to complete a more thorough and informative analysis). Internal management can dig deeper and complete financial ratio analyses more frequently, but make no mistake – these are tools that are essential for both internal and external parties!

Before we provide a listing of what are considered the standard or basic financial ratio analyses, it will be helpful to walk through a list of commonly used financial and accounting terminology (to ensure that you are well versed with financial lingo):

• Top Line: A company's net sales revenue generated over a period of time (e.g., for a 12‐month period).
• COGS or COS: Pronounced like it is spelled; stands for costs of goods sold (for a product‐based business) and costs of sales (for a service‐based business). ...