From my articles, we understand that we can choose many kinds of ratios which are categorized into Profitability, Liquidity, Activity, Leverage, Market base, Bankruptcy

I believe all ratios are of certain importance and has its relevancy in its own area of specialty. Whether a ratio has more value than another will depend largely on:

• Role or the objective of the person asking it whether he or she is acting as an investor, a supplier and others;

• The type of industry we are in as different industry has different focus in certain ratios.

Surely, for the aggressive investor, that ratios will likely be the ROE ( refer DuPont System Of Ratio Analysis) and other market base ratios like dividend payout, earning per shares and price earning ratio.

However for a supplier of goods and services to a company, he is interested in the evaluation of the risks associated with the ability of the company to remain solvent, a ratio like the acid test, number of days owing to Accounts payable, etc or the debt ratio will have considerable importance.

For a credit analyst, he would like to perform a full body of ratio analysis basing on all the categories of ratio so as to have a “fuller” picture of the financial health of the company.

Secondly, it’s important to know what is the type of industry are we assessing.

For example:

In Retail, Merchandising Industries
We should pay closer attention to activity ratios and inventory turnover. Inventory turnover and activity ratios are key indicators of efficiency in sales.

In Service Industries
Here, we should pay closer attention to activity ratios and accounts receivables turnover.
Activity ratio are key indicators of efficiency in sales and in managing receivables. In a service based industry, you do not see big chunks of fixed assets hence fixed assets turnover is of lesser importance.
E-Commerce
We should look closely at the activity ratios, liquidity, and leverage, in addition to serious scrutiny on ROI projections. We should also emphasize on the worthiness of the business model, the target market, who the investors are and why they think the company has a chance, etc.

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