Financial sales and profitability analysis are useful indicators of a firm’s performance and financial situation. Most ratios can be calculated from information provided by the financial statements.
Financial ratios can be used to analyze trends and to compare the firm’s financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios can be classified according to the information they provide. Liquidity Ratios Liquidity ratios provide information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Short-term creditors prefer a high current ratio since it reduces their risk.