Ratio analysis is a systematic process that allows financial planners to manipulate figures generated from the financial statements. The results from the manipulation provide meaningful information that is essential in the decision-making process (BFO, 2016). The concept of ratio analysis has difficulties of its kind though the challenges vary from one person to another. Primarily, most people encounter problems in establishing the right proxy that would be used to base and analyze the figures calculated during the calculation of the ratios. In other words, interpreting the results from the calculations is the most challenging aspect of the ratio computation process. Many parties like security analysts, investors; credit bodies, competitors, and industry observers use ratio analysis (Wiley, 2006).
Notably, ratio analysis has greater benefits to both the manager and the investors. All businesses operate under one objective- to make profits. With that in mind, managers need to have a system of computation that would tell them the progress of their businesses. Ratio analysis will help managers to establish the performance of their firms over time (BFO, 2016). As such, ratio analysis will enable them to determine whether the business is progressing or failing. The ratios can also help managers to measure the performance of their organization against that of competitors. Most people would like to invest in businesses that make profits. Thus, through ratio analysis, an investor can be in a position to tell whether to invest in a particular company or not. His/her decision will be based on how profitable the company in question is.
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The two most important ratio analyses are the profitability and the market value ratios (BFO, 2016). As aforementioned, most organizations strive to make profits. Thus, the profitability ratio would be important in determining how profitable a business operation is. The market value ratio, on the other hand, is used in valuing the stock of a firm. Such information tells managers and investors about the price that a company’s stock would fetch from the market. About business ethics, ratios analysis helps in making proper (ethical) decisions based on the concrete financial information at hand. That is because there have been many unethical issues in business such as cooked economic data from areas of great concern (Wiley, 2006). Fraud information would make managers and investors to make wrong decisions regarding the organizations that they are involved in.
In summary, ratio analysis acts as a decision-making tool for investors and administrators. It also provides businesses with the needed information t how they are faring in the market. Managers can use such information to establish the competitive abilities of their firms and also plan on how they can topple their competitors in the market. Thus, ratio analysis is the backbone of any business whatsoever.
References
Business Finance Online (BFO). (2016). Ration Analysis. Business Finance Online . Retrieved from http://www.zenwealth.com/businessfinanceonline/RA/RatioAnalysis.html.
Wiley, J. (2006). Ethics in Accounting . John Wiley & Sons Inc. Retrieved from http://higheredbcs.wiley.com/legacy/college/kieso/0470374942/gate/Ethics_in_Accounting/ethics_in_accounting.html.
