This article focus on some commonly asked questions on Ratio Analysis:
In my forthcoming articles on Ratio Analysis, I shall be tabulating useful major financial ratio into the following compartments for easy assimilation:
·         formula,
·         how is it to be used,
·         scores or values,
·         interpretation and comments
Now let’s start with the Commonly Asked Questions:
1.                   What is Ratio analysis?

• Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance.

2.                   Who is interested in Ratio analysis?

• Since it’s able to assess a firm’s financial condition and performance, hence it is of  interest to shareholders, creditors, and the firm’s own Management.

 
3.                   How many types of Ratio comparison?
There can be broadly classified into three (3) types:

1. Trend or Time-Series Analysis
• To evaluate a firm’s performance over time

2. Cross-Sectional Analysis

·         To  compare one firm’s financial performance to the industry’s average performance. Cross-sectional analysis is used to compare different firms at the  same point in time.

3. Combined Analysis

·         Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis
4.                   What are the cautions in using Ratio Analysis?

1. Ratios must be considered together;

2. Financial statements that are being compared should be dated at the same point in time.

3.   Use audited financial statements when possible.
4    Merely numbers & data hard to get.
5         Be wary of inflation distortions, historical cost, different accounting policies, management manipulation & different definitions
5         It is difficult to define categorically what a good or bad ratio value should be.
5.                   How many types of Financial Ratio Classifications?
Broadly classified into:

1. Liquidity
2. Asset Management
3. Profitability
4. Financial leverage management
5. Market based
6. Dividend policy
7. Bankruptcy – Altman Z

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