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:
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:
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