Financial Ratios: What They MeanIn assessing the significance of various financial data, managers often engage in ratio analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other information. Since they are often compared with industry data, ratios help managers understand their company's performance relative to that of …show more content…

The following is a listing of some of the ratios to be aware of in analyzing a company's balance sheet and income statement. These ratios fall into four categories — liquidity, profitability, asset management (efficiency), and debt management (leverage). How to find information on industriesThe United States Government is currently in transition between two systems of classifying American industry. The older Standard Industrial Classification Manual (http://www.osha.gov/oshstats/sicser.html) lists government SIC codes — 4 digit numbers used to identify industries. The new system, North American Industry Classification System (NAICS codes) (http://www.census.gov/epcd/www/naics.html) provides common industry definitions for Canada, Mexico, and the United States. This system will be phased in and eventually replace the SIC code. A comparison of the two systems can be found at http://www.census.gov/epcd/www/naicstab.htm. Where to find standard financial ratiosThe following is an annotated list of the "standard" sources of industry ratios. In the introduction of each of these sources, there is a description of how the data for the ratios was obtained and a definition for each ratio is also given. Almanac of Business and Industrial Financial Ratios. Leo Troy. Englewood Cliffs, NJ: Prentice-Hall, Inc. Annual. (REF HF 5681 .R25 T7)The source of all data are tax returns filed with the U.S. Internal Revenue Service. The most recent edition covers