Key Ratio Business Analysis Method

Key ratio analysis is also known as financial ratio analysis or accounting ratio analysis. This method is basically the determination of the ratio of the relative magnitude of any two selective numerical values in the financial statements of a business enterprise. In general accounting procedures, several standard key ratios are analyzed to evaluate the financial strength or weakness of an organization from various angles or perspectives. This key ratio analysis method is used by the management and other managers within the business venture, by the current shareholders and potential buyers of shares in the market, the creditors of the firm, security analysts, investment and fund managers, stock market brokers and consultants, and even government agencies.

This key ratio analysis helps all these groups to determine the soundness of the organization and compare its performance with that of its competitors, as well as its place in the economy. Most of the ratios are presented as percentages, while a few are expressed as decimal values. At times, the reciprocal values of the ratios are also used to compare certain financial factors. Normally, the values for calculating the key ratios are obtained from the profit and loss or income statements, cash flow statements, balance sheets, inventory details, investment and capital expenditure statements, funds flow statements such as borrowings, etc.

Review of this method in Business Analysis Toolkit

The detailed review of this business analysis method is a part of Business Analysis Toolkit. In this review you will learn:

  • What problems are solved by this method and how?
  • How to use the method step-by-step
  • Pros and cons for this method
  • Best practices for the method
  • Practices to avoid
  • Summary about the method

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