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As we look at the financial statements together and calculate ratios to understand the total business, we learn what’s helping the business succeed and pinpoint the red flags that warn of failure. Knowing how to calculate the ratios is necessary, but we also need to understand the purpose of each one. The following questions help us focus on the “why” behind the numbers:
If current liabilities are due within one year after the balance sheet date, why do we need to know the instant debt-paying ability of the quick ratio (also known as acid-test ratio)?
From looking at Return on Equity and Return on Assets of a business for a year, what is a quick way to tell if financial leverage is working to the business’s advantage?
What impact do increasing interest rates have on a business?
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