How to Understand Financial Analysis

Financial statements are used by a wide variety of groups as a first step in evaluating a firm's management and understanding a company's business activities. This note explains that absolute figures by themselves tell us little about whether a company is successful or how it has managed its assets and liabilities. The individual numbers must be related to one another to determine a firm's strengths and weaknesses. Ratio analysis consistently computed over time and across companies will help an analyst ask the right questions and obtain a better understanding of a firm's past operations and more accurate predictions of future performance.