Key Financial Ratios Checklist

This Key Financial Ratios checklist details the key financial ratios you can use to help you interpret financial information.

The ability to evaluate the financial position of another organization is a valuable skill for any manager to have, whether you are choosing a supplier, considering a strategic partnership, or trying to work out how much credit to extend to a customer. They can also give you a valuable insight how well an organization is managed at the highest level. Many organizations can appear successful despite deep structural problems with the way they are financed and managed.

Whilst you can compare the ratios of organizations in different industries is usually of limited value because of differences in market conditions, capital requirements and competition. The trend over time is often more revealing than one figure in isolation and that comparisons between industries may not be very useful. You must have a clear understanding of what the organization actually does and the industry it operates in before you draw any conclusions from these ratios.

To use key financial ratios you must have access to the four main financial statements of the organization you wish to assess. These are: the income statement, balance sheet, cash flow statement and the statement of retained earnings. You will also need to define an appropriate benchmark so that your financial ratios can be informative. This usually means comparing current performance to past performance or comparing performance to that of another organization.

There are several different key financial ratios that can be classified by the characteristic they measure: for example, solvency, profitability, performance, and investment history.