Financial Statement Analysis

Financial statement analysis looks to explain, often through financial ratios, the important relationships among the different numbers included in the financial statements. The ultimate goal of financial statement and ratio analysis is to help you interpret the numbers and come up with a clear picture of a company's financial performance and condition.

Before we jump in, we should inform you that the following ratios are for non-financial companies only. Financial companies have unique characteristics and their financial statements look much different from most companies.

A companies ratios are used comparatively in two main fashions: over time and against other companies. Comparing the same ratios for a firm over time is a great way to identify a compnay's trends. If certain ratios are are steadily improving, it may suggest an improvement in a company's operartion or financial situation; conversely, if certain ratios seem to be getting worse, it may highlight some troubling prospects about the firm.

It is also important to compare a company's ratios with others in the industry. A company's ratios may be improving over time, but how do they stack up against their peer's ratios? If they are not as rosy as their competitors, this may indicate that the company is not as well positioned or managed as well as other industry players.

You should evaluate many ratios as you perform your analysis. Four of the major types to consider are efficiency, liquidity, profitability and leverage ratios.

Efficiency Ratios Liquidity Ratios Leverage Ratios Profitability Ratios

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