Facts

• Financial statements are broken down using financial ratios that measure each section of a company's financial information. Common ratio groups are liquidity, asset turnover and financial leverage.
  
  

Types

• Liquidity ratios measure how well a company could pay off short-term debt with current assets, such as cash, receivables and inventories. Asset-turnover ratios indicate how well a company uses assets to generate sales. Leverage ratios determine the longevity of a firm based on current debt load.
  
  

Function

• Financial ratios create a simple trending tool that managers use when looking at the historical performance of business operations.
  
  

Considerations

• Companies often compare internal financial ratios with the industry standard or their top competitor to see how well their company operates in the current economic climate. This analysis creates a benchmark, giving managers a goal for improving operations.
  
  

Uses

• Banks and other lenders may review a company's financial ratios to determine how much risk a company has if it is borrowing money. Poor liquidity-ratio calculations can indicate low cash flow, making companies a weak candidate for loans.