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Financial Statements by Thomas Ittelson

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Chapter 13. Ratio Analysis

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.

For example:

• 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 ...

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