Ratio Analysis Definition
A ratio is a mathematical comparison of two values. Ratios are used to analyze financial statements and assess a company’s financial health.
There are four main types of ratios: liquidity, solvency, efficiency, and profitability. Each ratio measures different aspects of a company’s financial health.
Liquidity ratios measure a company’s ability to pay short-term debts. Solvency ratios measure a company’s ability to pay long-term debts. Efficiency ratios measure a company’s use of assets and management of expenses. Profitability ratios measure a company’s bottom line.
Ratio analysis is a powerful tool that can help investors identify red flags and make informed investment decisions. However, it is important to remember that ratios should be used as part of a broader analysis of a company’s financial health.
