AnalysisoffinancialstatementsFinancialstatementanalysisusesratioscalculatedfromacompany’sincomestatementandbalancesheettoevaluatethecompany.Theseratiosarecomparedwiththeratiosfrompreviousyearstoassesstrendsintheperformanceofthecompany.Ratiosarealsocomparedwiththoseofotherfirmsandtheoverallindustrytoassesstherelativeperformanceofthecompany.Financialstatementanalysisisakeyelementinsecurityanalysisandvaluation.Financialdataisconvertedintoratiostomakethemeasiertoanalyze.Comparisonbetween:ThisyearandpreviousyearsThiscompanyandothercompaniesThiscompanyandtheoverallindustryCalculationandinterpretationoffinancialratiosRatioscanbeusedtoevaluatefivedifferentaspectsofacompany’sperformanceandcondition:InternalliquidityOperatingperformance(operatingefficiency&operatingprofitability)RiskanalysisGrowthpotentialExternalliquidityEvaluatinginternalliquidityLiquidityratiosindicatetheabilityofthecompanytopayitsshort-termliabilities.ThecurrentratioThehigherthecurrentratio,themorelikelyitisthatthecompanywillbeabletopayitsshort-termdebts.Acurrentratiooflessthatonemeansthatthecompanyhasnegativeworkingcapitalanditfacesaliquiditycrisis.Workingcapitalisthedifferencebetweencurrentassetsandcurrentliabilities.Workingcapital=currentassets–currentliabilitiesAgeneralruleofthumbsuggeststhatthecurrentratioshouldbecloseto2.ThequickratioThisratioisastrictermeasureofliquiditybecauseitdoesnotincludeinventoriesandotherassets(suchasprepaidexpensesandsuppliesonhand)thatmightnotbeveryliquid:Thehigherthequickratio,themorelikelyitisthatthecompanywillbeabletopayitsshort-termdebt.ThecashratioThecashratioisanindicatorofacompany’sliquiditythatfurtherrefinesboththeHYPERLINK"http://www.investopedia.com/terms/c/currentratio.asp"currentratioandtheHYPERLINK"http://www.investopedia.com/terms/q/quickratio.asp"quickratiobymeasuringtheamountofcashandcashequivalentsthereareincurrentassetstocovercurrentliabilities.Cashequivalentsareassetsthatarereadilyconvertibleintocash,suchasHYPE