Chapter Summary:
To make analysis simple to be understand by the lay man is one of the aim of the decision maker. Financial ratios is the tool which can be used for the simplest analysis. Financial ratios are the ratio of the two different variables, and is the simplest tool to see the bivariate relationship over the time. These are mostly use to determine the financial performance of firm, industry or country. Decision maker use many different ratios, such as; leverage, liquidity, market and profitability ratios etc.
Ratio are simple to calculate, however, it is difficult to interpret, because they show us what happened but they can’t tell us why it happened. Decision maker have to compare the ratio for the proper decision with the similar kind of nature of study, because low value of the ratio does not implies poor performance and vice versa. Often ratio are quite misleading, so we have to work hard to give better decision. However, financial ratio analysis will give the decision maker more information about the performance with respect to past, present and future.