What is financial ratio analysis and why is it important?

What is financial ratio analysis and why is it important?

Financial ratio analysis is a method used to evaluate the financial health of a company by comparing various financial metrics. It's important because it helps investors and stakeholders make informed decisions.

Can you give me some examples of key financial ratios?

Sure! Some key financial ratios include the current ratio, debt-to-equity ratio, and return on equity. Each of these ratios provides insights into different aspects of a company's performance.

How do I calculate the current ratio?

The current ratio is calculated by dividing a company's current assets by its current liabilities. It measures liquidity and short-term financial health.

What does a high or low current ratio indicate?

A high current ratio indicates good liquidity, meaning the company can easily cover its short-term obligations. A low current ratio may suggest potential liquidity issues.

Are there any limitations to financial ratio analysis?

Yes, limitations include the reliance on historical data, potential manipulation of financial statements, and the need for industry context to interpret ratios accurately.