What Management can Learn from Ratios

Abstract

Why Ratios? The need for ratios rests upon the fact that absolute figures by themselves tell one very little about the performance of an organisation. The fact that a company made £1 million pre‐tax profit in its last financial year is no indication of its performance. If it had to deploy £1,000 millions of funds to achieve that profit then its performance was abysmally low. If it only employed £2 millions its performance was very good. In one sense then ratio analysis is concerned with expressing relationships between inputs and outputs, such as the capital required to support an activity and the profit earned from that activity; the sales achieved per square foot of sales space occupied; the cost per ton‐mile of delivering goods; and the way in which these different aspects relate to each other and to overall performance. In another sense they are concerned with relationships between aspects of a business which are crucial for its success, e.g. the relationship between short‐term assets and short term liabilities because it reflects the ability of the business to meet its obligations to creditors.

Citation

Wright, M.G. (1975), "What Management can Learn from Ratios", Managerial Finance, Vol. 1 No. 1, pp. 30-39. https://doi.org/10.1108/eb013340