### What is 'Ratio Analysis'

A ratio analysis is a quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items in financial statements like the balance sheet, income statement and cash flow statement; the ratios of one item – or a combination of items - to another item or combination are then calculated. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis.

### Explaining 'Ratio Analysis'

While there are numerous financial ratios, most investors are familiar with a few key ratios, particularly the ones that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, the debt-equity ratio, the dividend payout ratio and the price/earnings (P/E) ratio.

Financial ratios, discriminant analysis and the prediction of corporate bankruptcy
www.jstor.org [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … A short history of financial ratio analysis
www.jstor.org [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … A financial ratio analysis of commercial bank performance in South Africa
www.ajol.info [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … Some empirical bases of financial ratio analysis
search.proquest.com [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … A review of the theoretical and empirical basis of financial ratio analysis
ideas.repec.org [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … An empirical test of financial ratio analysis for small business failure prediction
www.jstor.org [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … Ratio analysis and equity valuation: From research to practice
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive … Financial ratio analysis comes to nonprofits
www.tandfonline.com [PDF]
… If a particular object, for instance a corporation, has characteristics (financial ratios) which can be quantified for all of the companies in the analysis, the MDA … When these coefficients are applied to the actual ratio, a basis for classification into one of the mutually exclusive …

#### What are some of the ratios that can be calculated using these line items?

Efficiency, liquidity, profitability and solvency.

#### What are the line items used to calculate ratios?

Balance sheet, income statement and cash flow statement.

#### What is a financial ratio?

A financial ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements.

#### What are the most common ratios used to evaluate the overall financial condition of a corporation or other organization?

The most common ratios used to evaluate the overall financial condition of a corporation or other organization are

#### How do you use ratios in accounting?

Ratios can be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by creditors. Financial analysts use these ratios to compare the strengths and weaknesses in various companies.

#### What is ratio analysis?

Ratio analysis is a quantitative analysis of information contained in a company's financial statements.

#### How does one use ratio analysis for fundamental analysis?

While there are numerous financial ratios, most investors are familiar with a few key ratios, particularly the ones that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, the debt-equity ratio, the dividend payout ratio and the priceearnings (PE) ratio.

#### How do you study trends over time with these ratios?

The trend of these ratios over time is studied to check whether they are improving or deteriorating. Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations.