From the class “Using accounting information” we know that ratio analysis is a good way to evaluate the financial results of your business in order to gauge its performance. Accounting ratios can offer an invaluable insight into a business' performance. Ratios give us a quick picture of the business performance but some cannot be measured.
Ratios are merely indicators. First, the analyst can compare a present ratio with past (or expected) ratios for the organization to determine if there has been an improvement or deterioration or no change over time. Second, the ratios of one organization may be compared with similar organizations or with industry averages at the same point in time. But ensure that the information used for comparison is accurate - otherwise the results will be misleading. The insights gained through the analyses of ratios will assist entrepreneur in gaining vital understanding of your company. For instance, from the figure of liquidity ratios you can find whether you have sufficient assents to cover your liability. Gearing is a sign of solvency. The higher the gearing, the more vulnerable the company is to increasing interest rate. Most lenders will refuse further finance where gearing exceeds 50 per cent. And profitability ratios tell how good you return on the capital used in your business is.
Ratios look back of the company performance, but entrepreneurs and analysts should not rest on the past records but have some forward steps with the help of ratios information.
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