1. Classification of financial ratios
1.1. Definition
1.1.1. A ratio
1.1.1.1. is a mathematical relation between one quantity and another.
1.1.2. A financial ratio
1.1.2.1. is a comparison between one bit of financial information and another.
1.2. By construction
1.2.1. A coverage ratio
1.2.1.1. is a measure of a company's ability to satisfy particular obligations.
1.2.2. A return ratio
1.2.2.1. is a measure of the net benefit, relative to the resources expended.
1.2.3. A turnover ratio
1.2.3.1. is a measure of the gross benefit, relative to the resources expended.
1.2.4. A component percentage
1.2.4.1. is the ratio of a component of an item to the item.
1.3. By characteristics
1.3.1. A liquid ratio
1.3.1.1. provides information on a company's ability to meet its short-term, immediate obligations.
1.3.2. A profitability ratio
1.3.2.1. provides information on the amount of income from each dollar of sales.
1.3.3. An activity ratio
1.3.3.1. relates information on a company's ability to manage its resources efficently.
1.3.4. A financial leverage ratio
1.3.4.1. provides information on the degree of a company's fixed financing obligations and its ability to satisfy these financing obligations.
1.3.5. A shareholder ratio
1.3.5.1. describes the company's financial condition in terms of amounts per share of stock.
1.3.6. An return on investment
1.3.6.1. provides information on the amount of profit, relative to the assets employed to produce that profit.
2. Definition
2.1. Financial analysis is the selection, evaluation and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision making
3. Functions
3.1. Internally
3.1.1. evaluate issues such as employee performance, the efficiency of operations, and credit policies.
3.2. Externally
3.2.1. evaluate potential investments and the credit worthiness of borrowers, among other things.
4. Sources of data
4.1. Internal data
4.1.1. Financial statement data
4.1.1.1. is the data provided by the company itself in its annual reports and required disclosures.
4.1.1.2. the annual report comprises the income statement, the balance sheet, the cash flow statement and footnotes to these statements.
4.1.2. Company events
4.1.2.1. that help explain the company's present condition.
4.1.2.2. a new product development, company regulation, acquiring another company, extraordinary losses.
4.2. External data
4.2.1. Market data
4.2.1.1. can be found in the financial press and the electronic media daily.
4.2.1.2. market data of listed securities and stock price indices.
4.2.2. Economic data
4.2.2.1. is readily available from government and private sources.
4.2.2.2. such as GDP and CPI.