Ratio Analysis
Contents page
Introduction……………………page1
Literature review………………page 2
Uses of ratios…………………...Page 2
Types of financial ratios………Page 3 ➢ Profitability ratios……….Page 3 ➢ Efficiency Ratios………....Page 4 ➢ Liquidity Ratios………….Page 5 ➢ Investment Ratios………..Page 6
Limitations of ratios…………..Page 8
Conclusion……………………..Page 8
Introduction.
The primary purpose of accounting is to convey information about the business to management, investors, shareholders, government and other interested parties. However absolute numbers in isolation are generally meaningless. The uses of financial ratios enable these figures to be related to other figures so as to put them into perspective. A ratio is a diagnostic tool that helps to identify problem areas and opportunities within a company.
Literature Review.
Shillinglaw Gordon et al (1979), asserts that the basic building block in financial statement analysis is the ratio, a percentage or decimal relationship of one number to another. Swanson Ross et al (1988), is of the idea that, “Financial analysis is crucial to managers in order to make decisions about operating a business”.
The Uses of Financial Ratios.
✓ Managers use them to analyse past results to control their business and plan for the future, in budgeting for example. Trends in the same business over a number of years will show whether it is progressing or deteriorating. ✓ Investors use the ratios to compare their investors with alternative forms of investments. Results in one business may be compared with results of other businesses; this is also known as inter-firm comparison, so as t5o see if it is performing well. ✓ They are also used by government statisticians who compile tables of national statistics on industry performances. ✓ Financial analysts compare ratios against the industry norm, aggregate economy and the economy’s past performance. They would be working for the financial press, trade
Introduction……………………page1
Literature review………………page 2
Uses of ratios…………………...Page 2
Types of financial ratios………Page 3 ➢ Profitability ratios……….Page 3 ➢ Efficiency Ratios………....Page 4 ➢ Liquidity Ratios………….Page 5 ➢ Investment Ratios………..Page 6
Limitations of ratios…………..Page 8
Conclusion……………………..Page 8
Introduction.
The primary purpose of accounting is to convey information about the business to management, investors, shareholders, government and other interested parties. However absolute numbers in isolation are generally meaningless. The uses of financial ratios enable these figures to be related to other figures so as to put them into perspective. A ratio is a diagnostic tool that helps to identify problem areas and opportunities within a company.
Literature Review.
Shillinglaw Gordon et al (1979), asserts that the basic building block in financial statement analysis is the ratio, a percentage or decimal relationship of one number to another. Swanson Ross et al (1988), is of the idea that, “Financial analysis is crucial to managers in order to make decisions about operating a business”.
The Uses of Financial Ratios.
✓ Managers use them to analyse past results to control their business and plan for the future, in budgeting for example. Trends in the same business over a number of years will show whether it is progressing or deteriorating. ✓ Investors use the ratios to compare their investors with alternative forms of investments. Results in one business may be compared with results of other businesses; this is also known as inter-firm comparison, so as t5o see if it is performing well. ✓ They are also used by government statisticians who compile tables of national statistics on industry performances. ✓ Financial analysts compare ratios against the industry norm, aggregate economy and the economy’s past performance. They would be working for the financial press, trade