All stakeholders within the company need to be able to appreciate how the company is performing. Their understanding of how the firm is performing is enhanced through ratio analysis.

Performance ratios are calculated by comparing two values in the accounts. It is worth remembering that ratios on their own are not particularly useful. You need to be able to compare ratios over time or against other ratios to be able to build up a useful picture of the performance of the company.

There are different types of ratios;

• Performance ratios, these include profit, capital employed and turnover.
• Liquidity ratios, concerned with short term financial position of the company.
• Gearing rations, focus on the long term financial position of the company.
• Shareholder ratios, concerned with the return for the shareholder.