Reading financial statements tells you what happened. Analysing them tells you what it means. Financial statement analysis uses ratios and trends to answer practical questions: is the business profitable, can it pay its bills, is it using its assets well and how much risk is it carrying? Managers do not need to be accountants to use it well.
If you are new to the statements themselves, start with our guide on how to read financial statements as a non-finance manager.
Four groups of ratios
1. Profitability
| Ratio | What it tells you |
|---|---|
| Gross margin | How much is left after direct costs |
| Operating margin | Profit from core operations as a share of revenue |
| Net margin | What remains after all costs |
| Return on capital employed | How well the business uses its capital |
2. Liquidity
| Ratio | What it tells you |
|---|---|
| Current ratio | Whether short-term assets cover short-term liabilities |
| Quick ratio | The same, excluding stock |
3. Efficiency
| Ratio | What it tells you |
|---|---|
| Debtor days | How quickly customers pay |
| Creditor days | How quickly the business pays suppliers |
| Stock days | How long stock sits before being sold |
4. Gearing
| Ratio | What it tells you |
|---|---|
| Debt to equity | How much the business relies on borrowing |
| Interest cover | How comfortably profits cover interest payments |
How to use ratios well
- Compare over time. A single ratio means little; the trend matters.
- Compare with peers. Norms vary hugely by industry.
- Ask why. A falling margin is a question, not an answer.
- Combine ratios. Strong profits with poor liquidity is a different story from strong profits and strong cash.
Common pitfalls
- Comparing businesses with very different models.
- Ignoring one-off items that distort a year.
- Treating ratios as precise when accounting choices affect them.
Building financial analysis skills
Our Accounting & Financial Statement Analysis course covers financial statements, ratio analysis, cost accounting and performance measurement for finance and non-finance professionals. For fundamentals, see Finance for Non-Finance Managers.
Frequently asked questions
What is the most important financial ratio for managers?
It depends on your role, but operating margin and cash-related measures such as debtor days are often the most useful day to day.
Do I need accounting knowledge to analyse financial statements?
A basic understanding of the three main statements helps, but ratio analysis itself is very learnable for non-accountants.
How is financial statement analysis used in decisions?
To assess performance, compare options, evaluate customers and suppliers, and support budgeting and investment decisions.