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Chapter 7. Ratio Analysis

In earlier chapters of this book, you learned about various indicators of a company's financial condition. Quantities and values such as current assets, inventory levels, sales, and accounts receivable all help you understand how much money a company has, how much it owes, and its profitability.

These numbers can be informative if you happen to have intimate knowledge of the company itself. Suppose, for example, that you work for a company that today has $2 million worth of materials in its finished goods inventory. In that case, you probably know whether that's an acceptable figure, whether it's so low that the company will have difficulty delivering the products that it sells, or whether it's so high that the company might need to slow down its production rate. Because you are familiar with the company and its operations, you have a context to help interpret that $2 million figure.


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