It is not so much the absolute numbers of sales, costs, expenses and assets that are important in judging the financial condition of an enterprise, but rather, the relationships between them.
• Cash available relative to the level of payables is a good indicator of how easily the company will be able to pay its bills in the future.
• Asset levels relative to sales volume indicates just how efficiently the company’s investments in productive assets (machinery and inventory) generate revenue.
• Gross margin as a percentage of sales determines how much the company is able to spend on various selling development and administrative activities and still make a profit.
Ratio analysis (that is, comparing one number ...