Welcome to Ratio Analysis!
Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things.
In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway!
The overall layout of this section is as follows: We will begin by asking the question, What do we want ratio analysis to tell us? Then, what will we try to do with it? This is the most important question, funnily enough! The answer to that question then means we need to make a list of all of the ratios we might use: we will list them and give the formula for each of them.
Once we have discovered all of the ratios that we can use we need to know how to use them, who might use them and what for and how will it help them to answer the question we asked at the beginning?
At this stage we will have an overall picture of what ratio analysis is, who uses it and the ratios they need to be able to use it. All that's left to do then is to use the ratios; and we will do that step- by-step, one by one.
By the end of this section we will have used every ratio several times and we will be experts at using and understanding what they tell us.
- What do we want ratio analysis to tell us?
- What do the users of accounts need to know?
- Activity 1 : Which ratio for which group
- Brief review of the accounts of Tesco plc