Financial statement analysis

Financial statement analysis turns raw accounts into judgements about liquidity, solvency, efficiency and profitability. The main tools are ratio analysis, funds flow analysis and cash flow analysis, plus the DuPont breakdown that links profitability to return on equity. Worked example: a firm with current assets 600,000 and current liabilities 300,000 has a current ratio of 2:1 — it holds two rupees of short-term assets for each rupee of short-term obligation, which is generally comfortable, though too high a ratio can also mean idle stock or uncollected receivables. Ratios only speak when compared: with the firm's past, with rivals, or with a standard.