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Useful Ratios

Now that you’ve learned how to create financial statements, you should know a little about how analysts view those statements and what all the numbers mean. There are some basic indicators that are obvious. One expects net income to be a positive number, and a company’s assets are generally expected to exceed liabilities. But beyond that, there are many comparisons and computations that can be made that will lend insight as to the viability and success of a company. Here are a few of the more common ratios you can use to analyze and better understand financial statements.

Current Ratio

The current ratio is a comparison of a company’s current assets to its current liabilities. Divide total current assets by total current liabilities to get a number that is the dollars of current assets that are available to pay current liabilities. The result of this ratio should be a number greater than 1. The higher the number, the greater the company’s ability to meet its current obligations. A normal current ratio is 2.


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