Unit 3
Accounts & Finance
Ratio Analysis
Learning Objectives
Evaluate ratio analysis
Ratio Analysis
• Ratio analysis can help internal and external users
of accounts when studying the degree of success
of a company’s strategy
• Ratio’s looked at widely used by company
analysts and investors before making
assessments and taking important decisions on:
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Whether to invest in the business
Whether to lend the business more money
Whether the profitability is rising or falling
Whether management are using resources efficiently
Limitations of Ratio Analysis
1. One ratio result is not very helpful to make meaningful
analysis
2. Inter-firm comparisons need to be used with caution and
are most effective when companies in the same industry
are being compared
3. Trend analysis needs to be
4. Companies can value their assets in different ways and
different depreciation methods can lead to different
capital employed totals
5. Ratios are only concerned with accounting terms and not
other factors
6. Ratios are useful tools but they do not solve business
problems, they can highlight issues such as falling
profitability but on their own they do not do much esle
Task
• Complete the Ratio Booklet
Finish for homework