Many basic features of a business' business can be gleaned from their set of financial statements. However, the more intricate details can be found through ratio analysis.The financial statement's figures are measured in currency units, which have little value in themselves because they do not consider the scale of business operations. By comparing relative sizes of these figures, this problem with units of measurement are eliminated by removing the units entirely. The resulting ratios are scale-free and can be used in comparing:
- Two businesses of different sizes
- The same business as it grows (or collapses) over time.
Analysts have devised myriad ratios to use in this type of analysis. What do they mean in real-world terms?
