What is the difference between financial ratios and financial statements?

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by olen , in category: Taxation and Accounting , 10 months ago

What is the difference between financial ratios and financial statements?

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1 answer

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by liam , 10 months ago

@olen 

Financial ratios and financial statements are both important components of financial analysis, but they serve different purposes.


Financial statements are formal records that present the financial activities and overall performance of a company. They include the balance sheet, income statement, cash flow statement, and statement of shareholders' equity. These statements provide a snapshot of a company's financial health and can be used to assess its profitability, liquidity, solvency, and overall financial position.


On the other hand, financial ratios are calculated using data from financial statements and help to interpret the information contained in these statements. They provide insights into a company's financial performance and help to compare its financial health over time and against industry benchmarks. Financial ratios can be categorized into various types, such as liquidity ratios (e.g., current ratio), profitability ratios (e.g., return on equity), efficiency ratios (e.g., asset turnover), and solvency ratios (e.g., debt-to-equity ratio).


In summary, financial statements are the formal documents that present a company's financial information, while financial ratios are calculated using this information to evaluate and analyze a company's financial performance.