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Pyramid of Ratios
When using ratio analysis to assess a company’s performance, an advanced technique is to use a
pyramid of ratios. Below is an example of a pyramid of ratios, from CFI’s Financial Analysis
Fundamentals Course. The pyramid is a good way to visualize the drivers of return on equity. ROE
is broken down into its main profitability components, asset efficiency components, and leverage
components.
Ratios are a great tool for horizontal analysis, which looks at the change of an aspect of a specific
company over a period of time. As a business evolves, its operations might change in both nature
and scale. Ratios are a good way to preserve comparability. For a similar reason, ratios are also a
great tool to perform benchmarking, which entails comparing different companies at a specific
point in time.
By constructing the pyramid of ratios, you will have an extremely solid understanding of the
business and its financial statements. CFI’s
Financial Analysis Fundamentals
goes into detail on how
to create the pyramid of ratios on Excel!
Corporate Finance Institute
Financial Ratios
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