Using Ratios and Other Tools
In This Chapter
Putting profitability measures to the test
Focusing on activity measures
Preparing vertical and horizontal analyses
The information in this chapter helps you understand why financial accounting rules are so nit-picky. Properly classifying accounting transactions is key for user analysis, which is the topic of this chapter. Here, you learn about key measurements that financial statement users perform to gauge the effectiveness and efficiency of the way management is running the company.
Three major measurement categories are a company’s liquidity, profitability, and activity. You may assume that all investors care about is how profitable a company is, but that’s not necessarily true. Liquidity, which indicates how well a company can cover its short-term debt, and activity, which shows how well a company uses its assets to generate sales, have to be considered along with profitability to form a complete picture of how well the business is performing.
Wrapping up this chapter, you find out about horizontal and ...