[MUSIC] How do we determine if the company is doing well financially or not? We saw that Amazon had a net income of $0.6 billion at the end of 2015. Is that good or bad? To answer this question, we will look at a number of financial ratios. In this video, we will introduce the idea of financial statement analysis. We will also talk about the different tools used in financial statement analysis, as well as the approaches used with each tool. We will wrap up this video by defining the 5 most common categories of financial ratios. Financial statement analysis is a comprehensive analysis of a company strategy, its competition, regulation and factors that affect it, its past, current financial performance, the fundamental evaluation of a company relative to its stock price. And planning for the company's future operations, investments, and finances. In this course, we will focus only on financial performance and fundamental evaluation relative to stock price. The typical tools used in financial statement analysis are comparative analysis, common size analysis, and ratio analysis. Comparative analysis is the evaluation of consecutive financial statements of a company, to identify the direction, speed, and magnitude of any trends in financial performance. Common size analysis is the evaluation of the internal make-up of financial statements, and/or financial statements items across companies. For example, this could mean that a common size income statement would report all income statement items as a percentage of revenues. This is especially useful when you compare two companies that are widely different revenues. Similarly, all balance sheet items could be reported as a percentage of total assets. Ratio analysis evaluates the relationship between two or more economically important items. For this, prior accounting analysis is important and interpretation is very important. We will focus mostly on ration analysis. The approach that is used with each of these tools are as follows, Time-series analysis, Cross-sectional analysis, and Benchmark comparison. Time-series analysis is the comparison of a firm, with itself over time. Cross-sectional analysis, is the comparison of different companies in an industry, at a given point in time. Benchmark comparison is the use of pre-specified industry norms or benchmarks. In this course, we will mostly focus only on time series analysis. Financial Ratios largely fall into five different categories. Namely, profitability ratios, activity ratios, solvency ratios, liquidity ratios, and valuation ratios. Profitability ratios measure a company's ability to generate profits from its various resources. Activity ratios measure a company's ability to convert various assets, and liabilities into cash or savings. Solvency ratios measure if a company has sufficient cash to meet its long-term financial commitments. Liquidity ratios, on the other hand, measure if a company has enough cash to meet its short-term financial obligations. Finally, valuation ratios compare the current market price of a company stock, to certain items from the financial statements. Next time we will start looking at the various types of ratios within each category of financial ratios. [MUSIC]