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Part 3: Managing Money, Accounting, and ... > Chapter 13: Financial Analysis - Pg. 193

Chapter Financial Analysis 13 In This Chapter t The basics of financial analysis t Measuring liquidity ratios t Understanding solvency ratios t Analyzing profitability ratios In Chapters 11 and 12, I showed you the basics of balance sheets, income statements, and cash flow statements. Simply reading a financial statement will tell you something-- but not much. You'll see the dollar amounts of the accounts, and, if you have at least two years of statements, you'll see whether an account increased or decreased. But to really understand a company, you must analyze its financial statements. Aside from a basic understanding of the accounts, this requires some simple calculations. In this chapter, you learn basic financial statement analysis--how to look beyond the account values and relate them to one another so you can see into the company's financial structure and performance. Let's Get Analytical A ratio is a calculation that shows the relationship between two values. A ratio is nothing more than a division problem with a number on top (numerator) divided by a number on the bottom (denominator). Financial ratios show the relationship between two financial statement accounts. Ratio analysis enables you to measure a company's performance and creditworthiness (capability to pay its liabilities and take on additional debt). Financial ratios are not the only tool of financial analysis, but they are among the most powerful.