Measuring Financial Health

By themselves, financial statements tell you quite a bit: how much profit the company made, where it spent its money, how large its debts are. But how do you interpret all the numbers these statements provide? For example, is the company's profit large or small? Is the level of debt healthy or not?

Ratio analysis provides a means of digging deeper into the information contained in the three financial statements. A financial ratio is two key numbers from a company's financial statements expressed in relation to each other. The ratios that follow in the next posts are relevant across a wide spectrum of industries, but are most meaningful when compared against the same measures for other companies in the same industry.