Financial analysis tools can be extremely beneficial for a variety of reasons. Financial ratios, accounting data restated in relative terms in order to help people identify some of the financial strengths and weaknesses of a company, are the principal tool of financial analysis. Financial ratios are especially used to evaluate a firms performance. Financial ratios allow for two meaningful comparisons to be made of a firms financial data. Firstly, the ratios can be examined across time. Secondly, the firms ratios can be compared to the ratios from another firm (Keown et al., 2020). In analyzing a companys financial ratios taken from their financial statements, the firm can make better informed business decisions for their future. One example is the acid-test ratio, also known as the quick ratio. This financial ratio is the sum of a firms cash and accounts receivable divided by its current liabilities (Keown et al., 2020). This test shows if the company has, or is able to get enough cash to pay out its immediate liabilities. If the acid-test ratio is far lower than the current ratio, then the companys current assets are highly dependent on the firms inventory. If the ratio is less than one, the company does not have enough liquid assets to pay their current liabilities and this should be treated with caution. In the long-term, a low acid-test ratio is unsustainable and will require planning and significant changes from the company. Financial ratios allow for evaluation of a companys performance and are most effective when they are compared over several periods. Since the financial ratios are collected from past financial statements, they can not always be predicted accurately into the future.

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