I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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   The broad categories of ratios 

Ratios provide information through comparison.  

Accounting ratios help to summarise and present financial information in a more understandable form.  

Broadly speaking, basic ratios can be grouped into five categories. 

 

Profitability and return 

 

Long-term solvency and stability 

 

Short-term solvency and liquidity 

 

Efficiency (turnover ratios) 

 

Shareholders' investment ratios 

Shareholders' investment ratios are beyond the scope of the FFA/FA syllabus. Within the rest of this 

chapter, we will identify a number of standard measures or ratios that are normally calculated and 

generally accepted as meaningful indicators for the rest of these categories. Although these are standard 

measures, each individual business must be considered separately, because a ratio that is meaningful for 

a manufacturing company may be completely meaningless for a financial institution. 

The key to obtaining meaningful information from ratio analysis is comparison. This may involve 

comparing ratios over time within the same business to establish whether things are improving or 

declining, and comparing ratios between similar businesses to see whether the company you are 

analysing is better or worse than average within its specific business sector. 

It must be stressed that ratio analysis on its own is not sufficient for interpreting company accounts, and 

that there are other items of information which should be looked at, for example: 

(a) 

The content of any accompanying commentary on the accounts and other statements 

(b) 

The age and nature of the company's assets 

(c)