Accountancy/Ratios

financial ratios help us for better understanding of business' previous and future financial position and it s operating result, specially when we have tow year or more financial statement of a business. also, these ratios help us find critical items in auditing because there are relations between the financial statement items. For example suppose that in a company in second year sale, accounts payable and inventory were decreased in the other hand accounts receivable and expenses were increased a simple analysis with financial ratios can tell us what happened and will happen for company. some answers can be: 1- the operational activities have decreased. 2- the company has lost the market. 3- the sale prices has decreased 4- inventory has damaged and ... if we have the numbers we can better find out the cause financial ratios dividend in to : 1- liquidity ratios 2- leverage ratios 3- activity ratios 4- profitability ratios