Sensitivity Analysis
Definition
Testing how a result — such as profit or a valuation — changes when one key assumption is varied, to see which assumptions matter most and how much risk they carry.
Related Terms in Financial Analysis
Scenario Planning
Building several plausible future cases — such as best, base and worst — and modelling the financial outcome of each, so a business can prepare for a range of conditions rather than a single forecast.
Capital Budgeting
The process of evaluating and selecting long-term investments such as equipment or projects, using tools like NPV, IRR and payback to decide where to commit capital.
Current Ratio
Current assets divided by current liabilities, a measure of whether a business can meet obligations falling due within a year. Above 1 means current assets cover current liabilities; what counts as healthy varies sharply by industry.
Quick Ratio
A stricter liquidity test than the current ratio, dividing only cash, marketable securities and receivables by current liabilities. Inventory and prepayments are excluded because they cannot be relied on to convert to cash quickly. Also called the acid-test ratio.
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