An Introduction to Ratio Analysis
- Ratio analysis involves extracting information from financial accounts to assess business performance
- It helps managers to answer key questions including
- Why is one business more profitable than another one in the same industry?
- Is a business growing?
- How effectively is a business using assets and capital invested?
- What return on investment is expected?
- How risky is the financial structure of the business?
- Ratios can be compared over time and between businesses or functions to determine how well financial objectives are being met
Exam Tip
Formulas to calculate profit margins, mark up, RoCE and liquidity are provided on page 2 of your exam paper.