With the preparation of a cash flow statement, we now have the core content of a set of financial statements. These financial statements, now referred to as a statement of financial position, statement of comprehensive income, and cash flow statement, along with explanatory notes and schedules, are distributed to shareholders of the company and government. It is also these financial statements that are available to other interest groups such as investors and holders of the debt capital of the company.
The financial statements provide a significant amount of information about the company and its results for the period under review. However, on their own, they are not adequate for decision making. Ratio analysis provides an in-depth look at the details behind the figures. The following screenshot is an example of a set of ratio analysis:
By looking at the relationship between strategic pairs of figures from the accounts, ratio analysis can provide insights about the profitability, liquidity, efficiency, and debt management of a company for the year, as well as over a period of time. The ratios in the preceding screenshot are by no means exhaustive. There is a vast array of ratios to choose from and different modelers will have their own preferences.
However, what is important is that you should be able to interpret whichever ratios you choose to include in such a way as to provide qualitative assistance to the decision-making process.