Introduction to Other Financial Components

What you will learn to do: Explore how other financial components are accounted for and presented.

Photograph of a woman in business attire pointing at a pie chart, which is drawn above a bar chart.

Analyzing financial ratios allows a business to evaluate its overall financial health and identify trends

Financial statements are an essential tool for analyzing the financial position of a business. In addition to reporting items such as assets, equity, revenues and expenses they allow managers to calculate financial ratios that communicate essential information about the financial health of a business. Core financial ratios that measure items such as return on investment and equity are just two of the key financial ratios calculated from information on the financial statements.

Using ratio analysis managers can quickly evaluate how effectively the company is using debt to fund operations, its overall cash position as well as it’s ratio of debt to income. By calculating key financial ratios managers are able to make period to period comparisons of the financial position of the company and be alerted to potential problems or opportunities to make the company more efficient and profitable. As a manager, it is essential that an individual understand how the financial ratios are calculated and interpreted.