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Financial Analysis

Financial analysis transforms raw financial data into actionable insights for decision-making. This guide covers key ratios and analysis techniques.

Profitability Ratios​

Gross Profit Margin​

(Gross Profit / Revenue) × 100

Interpretation: Percentage of revenue after direct costs Good: Industry-dependent, higher is better

Net Profit Margin​

(Net Income / Revenue) × 100

Interpretation: Bottom-line profitability Good: Generally 10%+ (varies by industry)

Return on Assets (ROA)​

(Net Income / Total Assets) × 100

Interpretation: How efficiently assets generate profit Good: 5%+ is decent, 20%+ is excellent

Liquidity Ratios​

Current Ratio​

Current Assets / Current Liabilities

Interpretation: Ability to pay short-term obligations Good: 1.5-3.0 (below 1.0 is concerning)

Quick Ratio​

(Current Assets - Inventory) / Current Liabilities

Interpretation: Ability to pay without selling inventory Good: 1.0+ is healthy

Efficiency Ratios​

Accounts Receivable Turnover​

Revenue / Average Accounts Receivable

Interpretation: How quickly you collect from customers Good: Higher is better (faster collection)

Inventory Turnover​

COGS / Average Inventory

Interpretation: How quickly inventory sells Good: Varies by industry, higher generally better

Leverage Ratios​

Debt-to-Equity Ratio​

Total Liabilities / Total Equity

Interpretation: Financial leverage/risk Good: Below 2.0 (lower is more conservative)

Debt Service Coverage​

Operating Income / Total Debt Service

Interpretation: Ability to service debt Good: Above 1.25 (lenders often require 1.2+)

Trend Analysis​

Compare financial statements over time:

  • Month-over-month
  • Quarter-over-quarter
  • Year-over-year

Look for:

  • Revenue growth/decline
  • Expense increases
  • Margin changes
  • Cash flow patterns

Benchmarking​

Compare your metrics to:

  • Industry averages
  • Competitors
  • Your own historical performance
  • Best-in-class companies

Next Steps​

Learn about starting a new period to close the current period and prepare for the next.