# Business Studies: Ratio Analysis: Introduction

## Business Studies: Ratio Analysis: Introduction

### ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Ratio Analysis: Introduction

• Businesses record financial transactions as part of the finance and accounting function
• This financial information is presented in the form of financial statements also known as final accounts at the end of each year/trading period
• This information is used by various stakeholders of the business to make sense of the business’s performance and decisions
• Often the figures provided by the financial statements make little sense by themselves
• For example if a business made a profit of $1 000 000 • Did the business perform well or not? • Did it do better than X Ltd our competitor which made a loss of$10 000?
• Without context it would be difficult to pass judgement on these figures
• To help with decision making and understanding financial information has to be analysed
• A common technique is to use ratio analysis
• A ratio is when one number is given in relation to another usually by dividing the two numbers
• Ratios can be expressed as a fraction, decimal or percentage
• For example 1 in 4 employees are HIV positive in a given company is a ratio
• It could be expressed as:
1. 1 in 4
2. 1 as to 4
3. 1:4
4. $\frac{1}{4}$
5. 0.25
6. 25%
• Note that while it is possible to represent the ratio as 10:40 in business speak it is customary to present it as 1:something to wit the above would be 1:4
• This is true even if the other value would become a decimal for example 1 : 0.9
• The preferred way of presenting each ratio will be shown as we discuss each ratio
• Analysis  refers to a systematic examination and evaluation of data or information, by breaking it into its component parts to uncover their interrelationships
•  Ratio analysis is therefore a technique in finance where financial data is analysed and broken down in order to be compared to:
1. Past performance of the organisation e.g. the business’s previous year’s results
2. Against a competitor’s performance e.g. Econet compares its results against Telecel and Netone
3. Against the industry average
• For results to be meaningful comparisons have to be between organisations in the same industry/line of business.
•  It would be unhelpful to compare the financial statements of a baker (Lobels) and Econet (Mobile network operator)
• There a lot of ratios but the following groups of ratios are of interest to ordinary level students:
1. Profitability ratios
2. Liquidity ratios
3. Gearing ratios