# 1.2.1 Ratios

Ratios are central to financial analysis.

Why are ratios so important? In short, ratios make numbers meaningful by providing comparability across companies and time. Coca-Cola’s Net Income for 2015 was $7.3 billion. Is that a lot of money for them? Is that a good number? It’s hard to tell without context. Alternatively, knowing that Coca-Cola’s Net Income was 16% of its Revenue (Net Income/Revenue) is much more helpful. Likewise, knowing that Coca-Cola has $64 billion in Liabilities may not mean very much; knowing that 71% of its Assets are financed with Liabilities (Liabilities/Assets) tells us a lot more about that company. Now, we can compare those ratios to other companies’ ratios and to previous performance.

## Grouping Ratios

Below are many of the financial ratios that appear in the Selected Financial Data section. Which of these go together? Group the ratios into four categories – Liquidity, Financing (we’ll sometimes call this Leverage), Productivity or Profitability. Don’t worry if you have no idea what the ratio is saying – think about the two things it’s comparing and make your best guess. We’ll go over each of them in detail in a moment, so it’s ok to be wrong.

Click and drag each of the ratios into the proper bucket.

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