Chapter 1
Ratio Analysis
IN THIS CHAPTER
Introducing examples of and caveats about ratio analysis
Analyzing liquidity ratios
Analyzing leverage ratios
Analyzing activity ratios
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.
If you compare your gross margin percentage for this year with ...
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