Financial Statement Analysis

Liquidity, Profitability, and Solvency are the three main characteristics used to determine a company’s success. These three characteristics will tell how financially stable a business is. Basic financial statements will not show this information because they do not go as in depth, and do not show a trend over time. Looking at a trend over time, a company’s ratio of vertical analysis and horizontal analysis can be determined. A ratio analysis is used from the liquidity, profitability, and solvency through analyzing this data. By taking a look at the whole picture, one can see how the company is really doing over a period of time; and be able to make more accurate depictions of the company’s future financial situation. This is very useful when looking for somewhere to invest money.

In order to understand a company’s successes or failures, one must first understand each of the characteristics used when looking at its financial documents. Liquidity, profitability, and solvency are all calculated by using ratio analysis. Ratio Analyses involve dividing two numbers to get a number or percentage, which can then be compared to other companies in the same industry.

Liquidity is the measure for a company’s ability to pay its debts as they are due. It is usually expressed as a ratio or percentage of current liabilities. Liquidity can be calculated into a ratio by dividing the current cash by current liabilities. Liquidity ratio is sometimes referred to as the current ratio. This ratio is important because it shows the company’s ability to cover short-term debts in an emergency. This number is also important because if a company is having trouble meeting its current obligations, than it is probably in a very grim financial situation. The higher the ratio, the larger the safety margin the company has to cover short-term debts. Liquidity ratio also gives insight to the company’s efficiency, or its ability to turn a product into cash. If a company has...