Having developed the three primary financial statements, it is important next to compare the data so that we can better under the significance of the financial information. Financial ratios permit us to identify the financial strengths and weaknesses of the headquarters' company by comparing the company to industry norms, by reviewing changes in the ratios over time, or by comparing the business to other businesses in the same industry. Probably the two best resources for industry norms are published annually by Robert Morris Associates, and Dunn and Bradstreet.

Ratio analysis is very important for the franchisor to establish norms and seek patterns of financial operations over a period of time. Unfortunately, few franchisors (or any kind of business) use ratio analysis -- it is estimated that just two percent compute financial ratios and use them in managing their businesses. The franchisor can use ratio analysis also to obtain a bank loan.

There are different financial ratios which may be developed. However, there are twelve major key financial ratios divided into four classifications including: 

(1) liquidity ratios,

(2) leverage ratios, 

(3) operating ratios, and 

(4) profitability ratios.