Understanding the Interpretations
In going about the analysis process, how does one interpret the resulting ratios? They may be numerical figures but they have stories to tell or exhibit tell-tale signs that foretell.
Basically, ratios are derived by dividing a particular value or number by a related value. This is done in order to determine a rate or proportion. Results are expressed either as (1) percentages, (2) number of times within a period, or (3) the equivalent number of dollars of a specific value for every one dollar value of a related item. They serve as indicators to evaluate the aspects of liquidity, profitability, productivity or efficiency of a business entity or organization.
Lending institutions, for example, look for clues about a business entity’s credit-worthiness by analyzing its liquidity and repayment capacity. Investors infuse money as investments but may find it necessary to divest or unload after careful evaluation of their portfolio. Managers have to present options and justifications to top-level management regarding the rationality of their recommendations.
Get explanatory guidelines from the following articles on how analysis ratios provide support in addressing such concerns:
Since we are offering this as a guide to understanding and using analysis ratios for both accounting and finance purposes, we will examine actual calculations and interpretations according to the aspects of liquidity, profitability and productivity or efficiency.