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How are financial ratios and trend analysis used to analyze and interpret financial statements?

How are financial ratios and trend analysis used to analyze and interpret financial statements? Which category (profitability, efficiency, liquidity, gearing, or investment) of ratios is most useful for company managers and why?

With references.

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Dear Student,

Ratios are very important profit tools in financial analysis that help managers implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.
Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry.

All of those ratios are pretty much equally important to managers for steering the company in the right direction. However, in my opinion, profitability ratios play a greater role, especially when investors and stockholders are concerned. THose ratios show how ...

Solution Summary

How are financial ratios and trend analysis used to analyze and interpret financial statements? Which category (profitability, efficiency, liquidity, gearing, or investment) of ratios is most useful for company managers and why?

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