Business and finance: What determines whether ratios are meaningful and useful?

Business & Finance
Tutor: None Selected Time limit: 1 Day

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.

What determines whether ratios are meaningful and useful?

Nov 15th, 2015

Thank you for the opportunity to help you with your question!

For ratios to be meaningful and useful, they must be:

  • Calculated using reliable, accurate financial information (does your financial information reflect your true cost picture?)
  • Calculated consistently from period to period.
  • Used in comparison to internal benchmarks and goals.
  • Used in comparison to other companies in your industry.
  • Viewed both at a single point in time and as an indication of broad trends and issues over time.
  • Carefully interpreted in the proper context, considering there are many other important factors and indicators involved in assessing performance.


Please let me know if you need any clarification. I'm always happy to answer your questions.
Nov 15th, 2015

Do you happen to have a reference for this answer?

Nov 15th, 2015

Brigham, Eugene F, and Michael C. Ehrhardt. Financial Management: Theory & Practice. Mason, Ohio: Thomson Business and Economics, 2008. Print.

Nov 15th, 2015

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