The reliability and value of the information gained from financial ratio analysis can vary
significantly, depending on how it was conducted and on the quality and comparability of the
financial statements, which provide the financial data. By itself, a ratio is just a number and not
inherently meaningful. Stand-alone financial ratios are like stand-alone numbers. They have
limited value unless associated with other references. For an obvious example, 3 by itself means
little unless associated with some base, such as 3 degrees on the centigrade temperature scale.
The two basic approaches for meaningfully associating financial ratios are trend analysis and
comparative analysis. In fact, it is the careful integration of trend analysis with ratio analysis that
provides the single most powerful technique for evaluating financial performance. Normally,
trend analysis is performed on annual or quarterly data because public companies have to report
this information to the stockholders.