Microsoft Office Tutorials and References

In Depth Information

**Financial Statements and Ratios**

Ratio analysis

Financial ratios
are calculations that are derived from the financial statements and other financial

data to measure various aspects of a company. They can be compared with other companies or

to industry standards. This section demonstrates how to calculate several financial ratios. See

Figure 13-14.

Figure 13-14:
Various financial ratio calculations.

Liquidity ratios

Liquidity ratios
measure a company’s ability to pay its bills in the short term. Poor liquidity ratios

may indicate that the company has a high cost of financing or is on the verge of bankruptcy.

Net Working Capital is computed by subtracting current liabilities from current assets:

=Total_Current_Assets–Total_Current_Liabilities

Current assets
are turned into cash within one accounting period (usually one year).
Current

liabilities
are debts that will be paid within one period. A positive number here indicates that the

company has enough assets to pay for its short-term liabilities.

The Current Ratio is a similar measure that divides current assets by current liabilities:

=Total_Current_Assets/Total_Current_Liabilities