Principles of Managerial Finance, 15th Edition

3.2 Using Financial Ratios

1. LG2

The information contained in the four basic financial statements has major significance to a variety of interested parties who regularly need to have relative measures of the company’s performance. Relative is the key word here, because the analysis of financial statements is based on the use of ratios or relative values. Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance. The basic inputs required to conduct ratio analysis are the firm’s income statement and balance sheet.

Interested Parties

Ratio analysis of a firm’s financial statements is of interest to shareholders, creditors, and the firm’s own management. Both present and prospective ...