Ratio Analysis: An Overview

Fundamental analysis comprises of a very broad outlook. One factor looks at the general aspects of a certain firm, and is known as qualitative factor. The other side considers tangible and measurable factors, and is known as quantitative factor.

Basically, it means crunching and studying numbers from the financial statements. Quantitative analysis is able to provide perfect results if used in conjunction along with other methods.

Ratio analysis is not making a comparison in different numbers alone from either balance sheet, income statement and cash flow statement. Rather, it’s making a comparison in number against prior years, as well as other firms, the industry or the economy.

The relationship between a single value and the previous performance of the company is what the ratio is analyzing, it also includes the possible future performance of the firm.  

For instance, current assets don’t tell us a whole lot, but when it is divided by the current liabilities, the capability of the company to cover short-term debts is determined.

In this discussion, the use of ratio analysis to analyze financial reports will be shown. The comparison of ratio vs. the numbers from the prior years, other companies, industry averages and the economy in a general-basis can assess where the firm is moving ahead. To value a company is never an easy task. This discussion will provide better understanding on how a ration analysis can be done and will definitely help you to make more informed choices as an investor.

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