If these statements are prepared by the contractor, they must be certified by an officer of the company. Analysis of financial ratios is discussed in textbooks and the professional literature. The choice of ratios selected depends on the particular case. Certain ratios may be useful to understand one case, while a different group may be more revealing in another case. Ratios are used for examining trends over time and making comparisons with industry averages.
Time series can reveal whether a financial situation is improving or deteriorating.
Care should be exercised to ensure that industry averages and ratios are truly comparable. There are a number of sources for industry averages. While financial ratios are useful in identifying trends in a contractor s financial condition, they are often not responsive to a rapidly deteriorating situation. In such cases, cash flow analysis will generally provide a more accurate picture of the contractor s financial health. Share prices are another indicator of financial health.