Managing Your Business
Analysing Your Financial Statements
A business Financial Statements contain many items that, taken by themselves, have no
clear meaning. One of the ways in which financial statements can be put to work is through
Generally ratios are divided into four areas of classification that provide different kinds of
information: liquidity, turnover, profitability and debt.
Liquidity ratios indicate the firm's ability to meet maturing short-term obligations.
Turnover indicates how effectively the firm manages resources at its disposal to generate
Profitability indicates the efficiency with which it manages resources.
Debt indicates the extent to which the firm is financed by debt.
Remember, ratios are just one number divided by another and isolation really don't mean
much. The trick is in the way ratios are analysed and used by the decision maker. A good
strategy is to compare the ratios to some sort of benchmark, such as industry averages or to
what a business has done in the past, or both.
Once ratios are calculated, an analyst should save benchmarks to find out where the
business stands. Useful benchmarks are industry comparisons and business trends. It may
be useful to compare a business to certain industry averages to get a feel for how the
business is performing. In that case it is necessary to obtain industry performance measures.
There are a number of sources for industry figures. At Kennedy & Co we have access to
various industry figures. Please speak to John Falzarano of this office if you would like to look
into performing ratio analysis for your business.