HBR Guide to Finance Basics for Managers (HBR Guide Series)

Using Statements to Measure Financial Health

By themselves, financial statements tell you quite a bit: how much profit the company made, where it spent its money, how large its debts are. But how do you interpret all the numbers these statements provide? For example, is the company’s profit large or small? Is the level of debt healthy or not?

Ratio analysis allows you to dig into the information contained in the three financial statements. A financial ratio is just two key numbers expressed in relation to each other. Using ratios, you can compare your company’s performance to that of its competitors, to industry averages, and to its own performance in the past. The ratios that follow are among the most common, and are used in many different industries. ...