Careful financial statement analysis usually means the extraction of meaningful ratios from the statements. These ratios have been classified as measuring (1) liquidity (current ratio, acid-test ratio, etc.) (2) activity (receivables turnover, inventory turnover, etc.) (3) profitability (profit margin on sales, rate of return on assets, earnings per share, etc.) and (4) leverage (debt to total assets, times interest earned, etc.) [Kiesco and Weygandt,1982]. Ratios are often used to assess performance or as diagnostic tools to point up potential problem areas. Given the extremely varied entities for which financial statements are made -- and even the extreme variation between industries of an entity type -- the most productive use of these ratios is probably made either against industry standards or against ratios for previous years of the entity in question.
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