Besides the coverage ratios previously discussed, there are a number of other ratios42 that financiers use to analyze cash flow and other financial statements. However, ratios by themselves mean almost nothing and need to be compared or benchmarked against other ratios in order to provide the greatest use. Ratio analysis can help to indicate whether a project's situation is getting better, worse, or staying the same. Ratios can also be used to indicate areas of strength and weakness within a project.
Ratios can be analyzed in a number of different ways and for different purposes:
■ Actual ratios achieved can be compared with an acceptable or safe norm, as per the sample coverage ratios in Box 3 - 5;
■ Ratios in the current and most recent years can be compared with the same ratios achieved in earlier years to detect an improving or declining trend;
■ Company or project ratios can be compared with similar ratios of other companies or projects;
■ Ratios can be used to analyze trends in a number of different areas including revenues and expenses. For example, an upward trend in revenues could indicate expansion or may be a result of inflation, whereas a downward trend could be the result of deflation, a lack of competitiveness, technical obsolescence or marketing problems;
■ Liquidity ratios can measure short-term cash flow relative to short-term commitments.
■ Long-term debt and solvency ratios can be used to assess the projects capital structure.
_______________________________________________________________________________
42 See Appendix 3 - Financial Calculations for a detailed list