Ratio analysis, a quantitative method of gaining insight into a company’s liquidity, operational efficiency, and profitability, involves the comparison of line items in a financial statement. For example, the current ratio, a measure of a company’s ability to pay short-term obligations, is computed by dividing current assets by current liabilities. The resultant figure expresses the extent to which current assets cover current liabilities.
Such analysis provides valuable information for stakeholders, including investors, creditors, and management. It can reveal trends, identify potential financial weaknesses, and facilitate benchmarking against industry peers. Historically, this type of evaluation has been a cornerstone of financial decision-making, offering a structured approach to understanding complex financial data.