Question

what interested parties who are using financial ratio analysis to help them in their decision-making. How do they use them?

Answer 1

Ratio analysis is defined as “a technique of financial analysis of a company in which meaningful relationship is shown between the components of financial statements”. Ratio analysis is often expressed proportionately to show the relationship between components in the financial statements. Ratios are guides or shortcuts that are useful in evaluating a company‘s financial position and operations of a company and making comparisons with results in previous years or with other companies. The primary purpose of ratio is to point out areas needing further investigation. They should be used in connection with a general understanAding of the company and its environment.

The ratio analysis is used to determine:

1)The short-term and long-term liquidity of a firm or the ability of the firm to meet its short-term (current) and long-term financial obligations.

2) The riskness or long-term solvency of a business. That is, the level of gearing or leverage or the extent the firm is financed by debt.

3) The Performance, profitability or overall earning power of a business.

4) The assets utilization or efficiency in the use of assets of a business to generate sales revenue.

5) The potential return and risk associated with owing shares or investing in the stock a company.