Ratios Need a Question, Peer, and Trend

A ratio earns its place only when it answers a decision question. Start with the category Liquidity asks whether near-term obligations can be met. Solvency asks whether the capital structure can survive longer-term stress. Profitability asks whether the business earns enough on sales, assets, or equity. Activity asks whether assets are being used efficiently. Benchmark before judging The same ratio can be healthy or risky depending on industry, business model, and trend. A retailer and a software company should not be judged by identical inventory or asset-turnover expectations. A covenant threshold matters differently from a peer median. Decompose surprising movements…

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