Using Financial Ratios for Analysis

With a few exceptions, the majority of the data used in ratio analysis comes from evaluation of the financial statements.

While ratio analysis can be quite helpful in comparing companies within an industry, cross-industry comparisons should be done with caution.

Comparing the financial ratios of a company to those of the top performer in its class is a type of benchmarking.

Trend analysis consists of using ratios to compare company performance on an indicator over time, often to forecast or inform future events.

Financial statement analyses can yield a limited view of a company because of accounting, market, and management related limitations of such analyses.