All Ratios

2. What is ratio analysis?

Every company keeps score using two main reports. Ratio analysis is the habit of pulling numbers out of those two reports and comparing them. The two reports every ratio comes from The balance sheet is a photograph. It freezes one single day and lists everything the company owns and everything it owes at that instant. If you took the photo a week later it would look slightly different. The income statement is a video.

6. What are the uses of ratio analysis?

Different people pick up the same ratio and use it to answer completely different questions. Owners and managers To spot problems early and steer. If stock is turning more slowly every quarter, that is money quietly getting trapped on shelves, and it shows up in the ratio long before it shows up in the bank balance. Banks and lenders To decide whether to lend, and at what interest rate.

7. Why is ratio analysis important?

Because without it, financial statements are just walls of digits — and a wall of digits does not let you make a decision. Ratio analysis matters because it converts raw accounting into three things a person can act on: can this business survive the next twelve months, is it using what it owns well, and is it improving or decaying.

8. What is an example of ratio analysis?

Here is the smallest complete example. A company owes $42,000 in bills over the next twelve months. It holds $84,000 of things that will turn into cash inside those same twelve months.

Where to go next?

Each ratio above has its own page, with the formula, the traps, and how to read the result.