The use and graphic presentation of financial ratios

Purpose: It was the purpose of this study to illustrate the use of financial ratios in determining areas of strength and weakness within the financial structure and policies of the business. The accountant of a firm has the responsibility of informing management of any financial areas which appear to be out of balance with accepted industry figures. The accountant should present his findings to management complete with concrete evidence of theses findings. The use of financial ratios provides the accountant with facts concerning the company’s conditions in comparison wit its own industry as a whole. Accountants are frequently aware of financial difficulties in the business, but are not anxious to approach management with their findings. The use of ratios in presenting this information allows both management and the accountant the opportunity of evaluating company policy on a nonpersonal objective basis. Methods: The actual financial data used in this presentation was obtained from the individual companies included in the study. Background information was obtained from text books and articles of professional publications. Eleven Ratios were selected for use, and these ratios were applied to the data of the selected companies. The ratios were presented by comparing individual company ratios to the typical figures of the company’s industry as a whole. This comparison was shown in graphic form to illustrate the clarity and brevity possible through the use of financial ratios. A short discussion of each ratio followed this presentation to show the process of analysis that is made possible by the ratio method. Findings: This study revealed several facts which are presented in the following order: 1. The accountant of a business should be responsible for informing management of present or apparent future problems of financial nature. 2. In presenting such information, the accountant should be equipped not only with his own professional opinion, but also with concrete facts with which to support his opinion. 3. The most effective method of presenting evidence of financial weakness is through the use of financial ratios. 4. Ratios which compare company financial positions to typical figures of the industry as a whole reflect specific areas which may require further investigation and corrective action on the part of management. 5. Management can more readily determine any variance between company and industry ratios from illustrations presented in graphic form. 6. Although yearly ratios are vital, ratio trends may provide more significant information. 7. Each ratio has its own use and function. Individual ratios should be used in conjunction with other ratios to arrive at a complete analysis of the business. 8. Financial ratios function merely as guides to management by pointing out specific problems in the firm’s financial structure and policy. Ratios are not intended to be substitutions for good and sound managerial judgments. Their use makes known financial areas that should investigated; they do not make correction or changes in policy. It remains the function of management to act upon the information provided by ratios