Financial ratios are relationships between different accounts from financial statements—usually the income statement and the balance sheet—that serve as performance indicators. Being relative values, financial ratios allow for meaningful comparisons across time, between competitors, and with industry averages.
Five key areas of a firm’s performance can be analyzed using the following financial ratios:
Liquidity ratios
Solvency ratios
Asset management ratios
Profitability ratios
Market value ratios
What does each ratio do for a business?
