Using the Financial Statements (ratio analysis definition)

Question 1

What is ratio analysis?

Answer 1

Ratio analysis expresses the relationships between selected items of financial statement data. Liquidity, solvency, and profitability ratios are the three general types of ratios that are used to analyze financial statements.

Ratios can give clues about underlying conditions that may not be easy to see when the items of a particular ratio are examined separately.

Question 2

What are liquidity ratios?

Answer 2

Liquidity ratios measure a company’s short-term ability to pay its maturing obligations and to meet unexpected needs for cash.

Question 3

What are solvency ratios?

Answer 3

Solvency ratios measure a company’s ability to survive over a long period of time.

Question 4

What are profitability ratios?

Answer 4

Profitability ratios measure a company’s operating success for a given period of time.

Question 5

In terms of ratios, what does the intracompany comparisons, intercompany comparisons and industry average comparisons cover?

Answer 5

Intracompany comparisons cover two years for the same company.

Intercompany comparisons are based on comparisons with a competitor in the same industry.

Industry average comparisons are based on average ratios for particular industries.