Interpreting financial ratios

• The long-term trend of the ratios can be as important as the absolute value of the ratio itself.
• General economic conditions affect the ratios; therefore, the investor should study the ratios with respect to the stage of the business cycle.
• Ratios should be compared to industry standards or norms.
• Ratios should be compared to management's stated goals for the firm.

Experience helps an investor to evaluate the meaning of the information contained within the financial statements.