An accounting ratio compares two line items in a company’s financial statements. These consist of its income statement, balance sheet, and cash flow statement. The ratios can be used to evaluate a company’s fundamentals and provide information about the performance of the company over the last quarter or fiscal year.1
Analyzing accounting ratios is an important step in determining the financial health of a company. It can often point out areas that are dragging the profitability of a company down and therefore need improvement. The effectiveness of new management plans, new products, and changes in operational procedures can all be determined by analyzing accounting ratios.
Accounting ratios also work as an important tool in company comparison within an industry. The company can see how it stacks up against its peers and investors can use accounting ratios to determine which company is their better option.
