Ratio analysis is a type of financial information that always prepared to satisfy in some way the needs of various interested parties (stakeholders). Below are some of the benefits that the stakeholders can get from the ratio analysis:
Planning and Forecasting
Management uses the ratio analysis to identify the future trends of its financial performance. With those information, its provide opportunity for the management team in planning and predicting the future of a company.
Comparing Performance
Analysts use ratios to compare the performance of a company with other firms in the same industry before deciding on where to invest. So that it can make the best decisions on investment. For example, profitability ratios allow the management to compare, evaluate and measure the performance with its competitors in the industry.
Evaluating solvency
By computing the solvency ratio, the companies are able to keep an eye on the correlation between the assets and the liabilities. This is helpful for creditors or lender’s decision because all of them are interested to know whether company will repay their debt or not under a specific period.
Judging Efficiency
Although ratio analysis are used to analyze the company's past financial performance, but it also can assists management team judging the company's efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.
Employees' decisions
Every employee wants to increase his salary and get more and more incentives from company. Besides, they also want to ensure that their jobs are secure. Thus, ratios will be helpful for employees to pressure on the company for increasing their salary or know about the company earning status.
Wood, F., & Sangster, A. (2008). Frank Wood’s business accounting 1 (11thed.).
Harlow, England: Financial Times Prentice Hall.
Ratio analysis (n.d.). Retrieved July 14, 2013, from http://www.readyratios.com/reference/analysis/ratio_analysis.html Advantages of ratio analysis. (December, 2011) .Retrieved July 14, 2013, from http://www.svtuition.org/2011/12/advantages-of-ratio-analysis.html
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