Unit 3 Accounts & Finance

1. Unit 3 Accounts & Finance Ratio Analysis

2. LearningObjectives • Evaluate ratio analysis

3. Ratio Analysis • Ratio analysis can help internal and external users of accounts when studying the degree of success of a company’s strategy • Ratio’s looked at widely used by company analysts and investors before making assessments and taking important decisions on: • Whether to invest in the business • Whether to lend the business more money • Whether the profitability is rising or falling • Whether management are using resources efficiently

4. Limitations of Ratio Analysis • One ratio result is not very helpful to make meaningful analysis • Inter-firm comparisons need to be used with caution and are most effective when companies in the same industry are being compared • Trend analysis needs to be • Companies can value their assets in different ways and different depreciation methods can lead to different capital employed totals • Ratios are only concerned with accounting terms and not other factors • Ratios are useful tools but they do not solve business problems, they can highlight issues such as falling profitability but on their own they do not do much esle

5. Task • Complete the Ratio Booklet Finish for homework