Ratios are an absolutely critical part of financial statement analysis. Ratio analysis allow us to analyze trends in a company’s performance over time, and to compare that performance to the competition.
Ratios are usually grouped into 5 categories:
(1) profitability ratios (margins and rates of return)
(2) short-term liquidity ratios
(3) long-term solvency ratios (debt ratios and coverage ratios)
(4) activity ratios (aka efficiency ratios)
(5) market value ratios
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