# 3.2 Who needs ratios? The manager’s perspective

Figure 6 Comparisons are vital in analysis of financial statements

Ratio analysis can also provide managers with a wealth of information and is primarily the reason why the technique is introduced here. A manager might not be expected to become as proficient in ratio analysis as, say, a banking loan analyst, but an ability to use its basic tools will benefit managers in their day-to-day work. For example, it is likely that a manager will at some time need to provide financial data to a bank, perhaps as part of a proposal for project funding. A basic understanding of how the bank will use the information will enable the manager to present their organisation’s case in the best way. However, while the bank example is valid and important, ratio analysis offers far wider benefits to managers. Whatever the manager’s role, it is very likely that they will need, from time to time, an understanding of the financial position of a competitor or a commercial partner. The latter could be a customer (can they pay when required?) or a supplier (can they be relied upon?). In all such cases, a short time spent analysing the organisation’s published information will provide a surprising degree of insight into a potential partner. The information collected will not only provide data about the organisation’s current financial health and how likely it is to survive in the short, medium or long term but also indicates how capable the operational management is in running the business. This will always be helpful in a general way, will usually provide a beneficial negotiating position and will sometimes warn against a very unfavourable relationship with an organisation.

## Comparisons

To analyse an organisation’s performance properly using ratios, you need to run comparisons.

Figure 7 shows the three different levels at which comparisons can be performed. Click on each heading to read more about each one.

Figure 7 A company’s financial data can be compared at three different levels

Any findings should always be investigated and interpreted. Differences with respect to sector average values or historical changes for any ratio may, given the prevailing circumstances, indicate a positive development, a negative development or a change of no significance. Furthermore, each ratio needs to be considered both as an indicator for one piece of the analysis of an organisation and as an element in the overall picture given by the full set of ratios.

OpenLearn - Financial statement analysis and interpretation
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