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Uses and Application of Ratios
Ratios are required in the following ways via managers in different firms.
1. Evaluating the efficiency of assets employment to generate sales revenue that is turnover ratio.
2. Evaluating the capability of the firm to meet its short term financial obligation like and when they fall due as liquidity ratios.
3. To carry out industrial analysis that is compare the firm's performance along with the average industrial performance of the firm by that of individual competitors in the similar industry.
4. For cross sectional analysis that is comparing the performance of the firm by that of individual competitors in the similar industry.
5. For trend/time series analysis such is evaluate the firm over time performance.
6. To establish the extent that the assets of the firm has been financed via fixed charge capital such is use of gearing ratio
7. To predict the bankruptcy of the firm such is utilizing of selected ratios to determine the overall ratio generally called Z-score. The Z-score when compared along with a pre-determined acceptable a Z-score will shows the probability of the bankruptcy of the firm in future.
Significance of Investment Decisions a) Such type of decisions is importance since they will influence the company's size or like fixed assets, retained and sales earnings.
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