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For any business to be successful, we need to constantly evaluate its performance by comparing it with company’s historical figures, with its industry competitors, and even with successful businesses from other industries. For a complete thorough examination of the company’s effectiveness, we need to look at more than just easily attainable numbers like sales, profits and total assets, we must be able to read between the lines of the company’s financial statement and make the outwardly insignificant numbers reachable and understandable.

 

This huge data overload could seem overwhelming. Luckily, there are many well-tested ratios out there that make the task a bit less intimidating. Comparative ratio analysis helps us identify and quantify the 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 valuable.

There are eight (8) major types of ratios used in financial analysis: Income, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage and Leverage.

- Based on the following: http://www.tdbank.com/small_business/workshops/Ratios/textratio_analysis.htm

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