Accountancy · Ch 10 — Accounting Ratios
Introduction
Introduction
Where Accounting Ratios Fit In
Financial statements exist to give decision-makers the financial information they need. Since companies publish these statements, both external users (investors, lenders, tax authorities) and internal users (management) can analyse, compare, and interpret the data to make informed decisions — a process collectively called financial statement analysis.
The previous chapter introduced five commonly used techniques of financial statement analysis: comparative statements, common-size statements, trend analysis, accounting ratios, and cash flow analysis — and covered the first three (comparative statements, common-size statements, and trend analysis) in detail.
This chapter takes up the fourth technique — accounting ratios — and shows how they are used to assess a company's solvency, efficiency, and profitability. Cash flow analysis, the fifth technique, is covered in the next chapter.