Ten Ratios for Financial Statement Analysis
In This Chapter
Understanding why financial statement ratios are important
Measuring ready cash on hand
Gauging efficiency of operations
Finding out about profitability analysis
Checking out ratio limitations
Why, you may be wondering, is GAAP so nit-picky? Because proper classification of accounting transactions is key for user analysis, which is the topic of this chapter. Here we take a look at key ratios that users of the financial statements perform to gauge the effectiveness and efficiency of a company’s management.
The four major ratio measurements are liquidity, activity, profitability, and coverage. But you may be asking, isn’t an investor interested only in how profitable a company is? Not necessarily. Liquidity, which is how well a company can cover its short-term debt; activity, which shows how well a company uses its assets to generate sales; and coverage, which measures the degree of protection for long-term debt, ...