In order to assess a company, most people immediately look at its profit history. While this is one of the indicators that should be considered, it could be a mistake to make a decision based solely on that information. As we saw in Chapter 7, Cash Flow Statement, profits do not always equate to cash, and even the most profitable company can fold if the profits are not backed up by cash flow.
Ratio analysis looks at the profitability, liquidity, asset management and efficiency, debt management, and market value of a company. Each ratio takes two strategic items from financial statements and examines the relationship between them in order to gain some insight into the company's profitability, liquidity, and so on.
In this chapter, we will cover the following topics:
- Understanding the meaning and benefits of ratio analysis
- Learning about the various kinds of...