CHAPTER 1

Ratios Overview

The ratios in this book are tools. They are primarily tools for turning the data contained in financial statements into information used by managers and executives to better understand what is happening in a company. Like all tools, they can be used for things other than their original design, such as evaluating an acquisition, creating pro-forma statements related to potential courses of action, or figuring out which stock to buy.

Financial ratios can typically be grouped into one of the following ratio types:

  • Market value ratios
  • Liquidity ratios
  • Performance ratios
  • Cash flow ratios
  • Profitability ratios
  • Debt ratios

There are a small number of ratios that do not fit into any of these categories. However, we have included ...

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