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Alaska Sea Grant Marine Advisory Program The Business of Fish

Handout 6

Analyzing Your Financial Ratios
Taken from http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html

Overview
Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income, Profitability, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and Leverage.

Outline: I. Purposes and Considerations of Ratios and Ratio Analysis II. Types of Ratios III. Income Ratios IV. Profitability Ratios V. Net Operating Profit Ratios VI. Liquidity Ratios VII. Working Capital Ratios VIII. Bankruptcy Ratios IX.

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