Longer explanations of how financial statements fit together and how to read ratios with care.
Average vs ending balances in ratiosRatios that set a full period of income against a balance sheet figure often use the average of the opening and closing balances. This guide explains why, which ratios do so and when ending balances are reasonable.
Financial ratio analysis exampleA worked ratio analysis of Example Co., an illustrative company with made-up figures, not a real business. It calculates liquidity, profitability, leverage and efficiency ratios from one year of statements and explains what more you would need before drawing conclusions.
How to analyze financial ratiosA practical method for financial ratio analysis: start with a question, choose ratios by category, compare them over time and with similar businesses on the same definitions, and read related ratios together with the notes.
How to read financial statementsThe balance sheet, income statement and cash flow statement each answer a different question about a business. This guide explains what each one shows, how the three connect and which figures feed the common financial ratios.
Limitations of financial ratio analysisFinancial ratios are only as reliable as the figures and definitions behind them. This guide explains the main limitations, from accounting choices and one-off items to differing definitions, and how to allow for them.
Why financial ratios vary by industryFinancial ratios reflect how a business operates, so they differ between industries and business models. This guide explains the structural reasons behind those differences and why you should compare like with like.
