Interpreting ratios involves comparing them with historical data, industry standards, or benchmarks. Here are a few general guidelines for interpretation:
Liquidity Ratios: Higher ratios generally indicate better liquidity. However, extremely high ratios might mean idle assets. Profitability Ratios: Higher profitability ratios are usually favorable, indicating efficient management and strong earnings potential. Efficiency Ratios: Higher efficiency ratios suggest better utilization of assets and faster inventory turnover. Solvency Ratios: Lower ratios are typically preferable as they indicate less reliance on debt. However, some level of debt can be beneficial for growth.