Summarize how managers evaluate the financial health of a business.
The firm's financial statements and its accounting information become more meaningful when compared with information for competitors, for the industry in which the firm operates, and corresponding information for previous years.
Such comparisons permit managers, employees, lenders, investors, and other interested people to pick out trends in growth, borrowing, income, and other business variables and to determine whether the firm is on the way to accomplishing its long-term goals.
A number of financial ratios can be computed from the information in a firm's financial statements. These ratios provide a picture of a firm's profitability, its ability to pay its debts, and how often it sells its inventory.
Like the information on the firm's financial statements, these ratios can and should be compared with information for competitors, for the industry in which the firm operates, and corresponding information for previous years.
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