FREE online courses on Financial Ratio Analysis - Why use ratios
It has been said that you must measure what you expect to
manage and accomplish. Without measurement, you have no reference to work with
and thus, you tend to operate in the dark. One way of establishing references
and managing the financial affairs of an organization is to use ratios. Ratios
are simply relationships between two financial balances or financial
calculations. These relationships establish our references so we can understand
how well we are performing financially. Ratios also extend our traditional way
of measuring financial performance; i.e. relying on financial statements.
Financial ratios provide the analyst with a means for making
meaningful comparison of a firm's financial data over time and with other firms.
Thus, financial ratios represent an attempt to standardize financial information
in order to facilitate meaningful comparisons. Financial ratios help us identify
some of the financial strengths and weaknesses of a company and help us compare
the firm's performance to similar firms in the same industry.
We can use ratios to answer some
important questions about a firm's operations.
