About Ratio Analysis

Financial statements provide information about a firm's position at a point in time as well as its operations over some past period. However, the real value of financial statements lies in the that they can be used to help predict a firm's financial position in the future and to determine expected earnings and dividends. From an investor's standpoint, predicting the future is what financial statement analysis is all about, while from management's standpoint,financial statement analysis is useful both as a way to anticipate future conditions and, more important, as a starting point for planning actions that will influence the future course of events.
An analysis of the firm's ratios generally is the first step in a financial analysis. The ratios are designed to show relationship between financial statement acoounts withinfirms and between firms. Translating accounting numbers into relative values, or ratios allows us to compare the financial position of one firm to another, even if their sizes are significantly different.