What’s it all about?
Techniques for assessing company performance against target, other organisations and over time.
The main difficulty with using financial ratios is that nobody can really agree on what the right ratios are and they are all subject to manipulation.
I don’t like teaching ratio analysis (not because it isn’t important) because it is not Management Accounting. It ends up in Man Acc modules sometimes – as if the Financial Accountants haven’t already taken over enough of your syllabus!
You do still have to be cautious about using Financial Ratios to evaluate businesses for investment decisions.
General ratio analysis.
Financial Ratios – some detailed examples
Many worked examples in this clip.
Dozens of ratios outlined.
Possible Written Questions.
(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.
Explain how you would use ratios to analyse company performance.
Name and comment on four different ratio categories applicable to the analysis of company performance. (N.B. A question like this might not ask for calculation, pay attention to the question!)
Comment on the differences between Return On Investment (ROI) and Residual Income (RI) as performance measures and the advantages and disadvantages of each.