In assessing the significance of various financial data, managers often engage in ratio analysis , the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses.
Ratios are only meaningful when compared with other information.
Since they are often compared with industry data, ratios help managers understand their company's performance relative to that of competitors and are often used to trace performance over time. Ratio analysis can reveal much about a company and its operations. However, there are several points to keep in mind about ratios. First, a ratio is just one number divided by another. One or even several ratios might be misleading, but when combined with other knowledge of a company's management and economic circumstances, ratio analysis can tell much about a corporation.