Financial ratios are computed from an organization’s income statement and balance sheet.
Computing financial ratios is like taking a picture because the results reflect a situation at
just one point in time. Comparing ratios over time and to industry averages is more likely to
result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses.
Trend analysis, illustrated in Figure 4-3, is a useful technique that incorporates both
the time and industry average dimensions of financial ratios. Note that the dotted lines
reveal projected ratios. Some Web sites, such as those provided in Table 4-5, calculate
financial ratios and provide data with charts.
Table 4-6 provides a summary of key financial ratios showing how each ratio is calculated
and what each ratio measures. However, all the ratios are not significant for all industries
and companies. For example, accounts receivable turnover and average collection