Course 304: Interpreting the Numbers
How to Use Financial Ratios
In this course
1 Introduction
2 How to Use Financial Ratios
3 Efficiency Ratios
4 Liquidity Ratios
5 Leverage Ratios
6 Profitability Ratios
7 The Bottom Line

We've touched on some of the ratios mentioned here in earlier lessons, but this lesson will give you a comprehensive look at the most important numbers to key in on. Some ratios can be useful by themselves. Others are completely useless when considered without context. Typically, financial ratios provide the most benefit when they are compared with other identical ratios.

A company's ratios are used comparatively in two main fashions: over time and against other companies. Comparing the same ratios for a firm over time is a great way to identify a company's trends. If certain ratios are steadily improving, it may suggest an improvement in a company's operations or financial situation; conversely, if certain ratios seem to be getting worse, it may highlight some troubling prospects about the firm.

It's also important to compare a company's ratios against those of others in the industry. A company's ratios may be improving over time, but how do they stack up against their peers' ratios? If they aren't as rosy as those of competitors, this may indicate that the company isn't as well positioned or managed as well as other industry players.

At Morningstar, we evaluate many ratios as we perform our analyses. Four of the major types we consider are efficiency, liquidity, leverage, and profitability ratios. As we describe some of the main ratios within each category, we'll discuss what each one attempts to measure and what changes in them may indicate.

Next: Efficiency Ratios >>

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