Financial ratios are only indications and not conclusions. They provide a tool for further financial analysis and must be taken in context. Context can be framed as the five Ws: Who, what, when, where, and why. Who is producing the data you are using and is it legitimate? What kind of business are you analyzing and comparing with? When or what time period are you using? Where is the business? And why are you doing this? Context is everything when drawing valid conclusions and making comparisons.
Ratios will help support conclusions and decision making. They provide standardized metrics for comparison across several different areas covered: Liquidity, profitability, solvency, operations, cash flow, valuation, and more. They provide business insights, lead to further investigation beyond ratios, and create useful benchmarks.
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Learn about finance and accounting with over 100 flashcards coordinated with video, audio, and traditional lessons. Covering the following ratio types: liquidity, profitability, debt, solvency, operating performance, cash flow, and valuation.