Importance of Financial Ratios

Business studies study module
  • Mark up and margin helps in the following; setting the selling price, calculating profit or losses and determining the sales for a given period of time
  • Working capital and acid test ratio help in showing whether the business is in a position to meet its short term obligations and checking whether the business is utilizing its resources properly. That is high working capital ratio shows that most of the resources are idle
  • Return on capital shows the following;
  • The performance of the business in relation to other similar businesses
  • Comparison of the performance of the business over different periods
  • Whether the business finances have been invested or not
  • Help the potential investors on the decision on where to invest
  • Rate of stock turnover also help in determining how fast or slow the stock is moving. It also helps in computing the gross profit or loss.



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