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Ratio analysis is a quantitative method of assessing a company’s financial performance by evaluating the relationships between various financial statement items. It involves comparing line items from the income statement, balance sheet, and cash flow statement to gain insights into financial health, efficiency, profitability, and liquidity.

Key types of ratios include:

1. **Liquidity Ratios** – These measure a company’s ability to meet short-term obligations. Common liquidity ratios are the current ratio and quick ratio.

2. **Profitability Ratios** – These evaluate a company’s ability to generate profit relative to revenue, operating costs, and equity. Examples include the gross profit margin, net profit margin, and return on equity.

3. **Leverage Ratios** – These indicate the extent to which a company is using debt to finance its operations. Common leverage ratios include the debt-to-equity ratio and interest coverage ratio.

4. **Efficiency Ratios** – These measure how effectively a company utilizes its assets to generate sales and maximize profits. Examples include inventory turnover and accounts receivable turnover.

By analyzing these ratios over time or in comparison to industry peers, stakeholders can make informed decisions regarding investments, lending, and overall business strategy.