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Summary

This chapter described some of the financial ratios that are important in understanding how, and how well, a company conducts its business. There are variations on virtually every ratio discussed here, and there are ratios that were not covered at all, but their principal forms follow the formulas illustrated.

Only occasionally can you calculate one of these indicators and gain immediate insight into a business operation. More frequently, it is necessary to know the sort of business that a company conducts, because the marketplace imposes different demands on different lines of business. Furthermore, you can usually understand one ratio by considering it in the context of another ratio (the debt ratio and the return on assets is a good example of one ratio providing the context for another).


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