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Financial ratios are a large family of ratios used to examine the financial state of a business. They show correlations between major financial documents like the balance sheet and the profit and loss statement. As ratios, these numbers pit two different figures against each other, dividing the two to show the difference between them. Accountants create formulas for examining current assets to current liabilities, debt to equity and many more ratios. These ratios all have common advantages.
Summation
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Ratios make it easy for people to see the state of a business in a specific area. They act as at-a-glance pieces of information. Behind the ratios are a number of decisions and data types that would take a considerable amount of time for someone to compare, especially if he did not know much about the company. Financial ratios give snapshots to help save time and sum up business conditions.
Comparison
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Financial ratios are made for comparison, not just between two aspects of the business but between businesses themselves and business goals. A company can take its financial ratios for equity, debt and liabilities and then examine what their financial goals are to see how close they have come, and what actions they need to take. Likewise, company leaders can use ratios to compare themselves to competitors.
Forecasting
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Many ratios help businesses judge their current capital and how much money they have available for expansion. These allow businesses to make more accurate forecasts about future events and the type of projects the business can undertake.
Investment
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Investors are especially interested in financial ratios. Just as businesses can use the ratios to compare themselves to competitors, investors can use the ratios to analyze their position in their industry and how successful they are. Each industry is typified by certain ratio amounts that indicate a healthy and growing business. Investors watch for these signs when looking for a business to invest in.
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