An Introduction to Understanding Financial Ratios

  • Price: £3.60
  • Published: September 2015
  • Type: Business Information Factsheet
  • Format: PDF

The financial position of any business can be determined from three key financial statements: the balance sheet, the profit and loss account and the cash flow statement.

In addition to examining the detailed information in these financial statements, calculating a few simple financial ratios can help you to assess how well a business is performing and provide early indications of financial problems:

  • Ratios can be used to set targets, and to provide early warning signs of any financial issues that need attention.
  • Ratios can be compared against other firms operating in a similar sector, giving an idea of relative performance.

This factsheet introduces the key financial ratios, explains how to calculate them and suggests typical values for a healthy business. It also includes hints and tips and sources of further information.

While not essential, some familiarity with the three financial statements mentioned above will make it easier to understand this factsheet. See BIF 8, A Guide to Understanding Profit and Loss Accounts; BIF 7, A Guide to Understanding Balance Sheets; and BIF 58, How to Forecast Cash Flow, for more information.

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