Page 6: Conclusion
Ratios are a tool to assist analysis. They focus attention on trends and weaknesses and facilitate comparison over time and between companies.
Ratios may change over time or differ between companies because of the nature of the business or management actions in running the business. But ratios alone don’t tell us enough about a company. It is important to gain a good understanding of the industry in which the company operates, to enable us to interpret the ratios.
This information can be obtained from many sources including newspapers, trade magazines, the Internet and the library. Even then, do financial statements tell the whole story? In many industries, particularly service industries, non-financial (or operating) ratios provide useful indicators of success. For example, in the health service one might monitor the average number of days a patient stays in hospital. And what about companies such as Microsoft? Microsoft is worth far more than the net assets in its balance sheet. What do its financial statements tell us? Is this information sufficient to help the users of accounts?