Financial Statement Analysis - Essay Example

The analysis of a company’s financial statement reveals the business's health and viability. One of the most reliable methods to analyze a company’s financial statement is to calculate certain financial ratios. These ratios can be broadly categorized (Fridson & Alvarez, 2011):1. Leverage;2.

Profitability;3. Liquidity;4. Activity. Leverage ratios indicate the extent a business relies on external debts to fund its processes. A debt-to-equity ratio provides a reliable indicator of how much external debt is being used to operate the company’s business processes. This allows a realization of how indebted a company is to its operations. Profitability ratios reflect how much profit the company is earning based on its principal investment. More commonly, a breakeven point allows a tabulation of how much business the company needs to do to ensure that its start-up costs are met.

Alternatively, the gross profit ratio reveals the expected profit outcomes resulting from the company’s regular business operations. The liquidity ratios determine how resilient a company would be in case of deficit financing. The current ratio reveals how much liquidity the company has to deal with its outstanding liabilities.