Ratio analysis information is historic – it is not current. Some firms may 'window dress' their accounts. Details here. Ratio analysis does not take into account external factors such as a recession or the actions of a competitor. Ratio analysis does not measure other qualitative aspects of a firms operations such as quality.
Ratio analysis does not measure the human element of a firm.
Profitability 1. Gross Profit Margin 2. Net Profit Margin 2. Return on Capital Employed
Financial Efficiency 1. Asset Turnover 2. Stock Turnover 3. Creditor Days 4. Debtor Days
Gearing Assessing the value and limitations of ratio analysis. Details here.
You also need to be aware of Working Capital.
A business is solvent if it
can meet its short-term debts when they are due for payment. To do this it
needs adequate working capital. There are three main reasons why a
business needs adequate working capital. It must: Pay staff wages and salaries.
·Settle debts and therefore avoid legal action by creditors.
·Benefit from cash discounts offered in return for prompt payment. You can calculate a firm's working
capital by using the following equation: Current Assets minus Current Liabilities
This is the day-to-day finance for running a business. You need to know the consequences of having too little or too much working capital.
Excellent resource for ratio analysis. Click on the picture:
