Chapter 1

Ratio Analysis

In This Chapter

arrow Introducing examples of and caveats about ratio analysis

arrow Analyzing liquidity ratios

arrow Analyzing leverage ratios

arrow Analyzing activity ratios

arrow Analyzing profitability ratios

Numbers from your financial statements make more sense when you can compare them with other numbers and external benchmarks. In this chapter, I talk about how you can perform this sort of analysis, which is called ratio analysis. Even if you’re not a numbers person, you can use ratio analysis to your benefit. Ratio analysis is easy to apply, and it enables even the nonquantitative type of person who uses it to better understand the information in financial statements.

Let me give you a quick example of ratio analysis. One particularly useful ratio is the gross margin percentage, which is your gross margin divided by your total sales. Although this ratio may not seem useful at first blush, it can be very valuable.

For example, if you compare your gross margin percentage for this ...

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