Introduction to Financial Ratios

When computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This meansassets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.

These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.

Our explanation of financial ratios and financial statement analysis is organized as follows:

• Balance Sheet
  • General discussion
  • Common-size balance sheet
  • Financial ratios based on the balance sheet
• Income Statement
  • General discussion
  • Common-size income statement
  • Financial ratios based on the income statement
• Statement of Cash Flows