The investors and other external interest groups of a company usually only have access to the financial statements of the company. However, financial details alone are of limited use when trying to assess a company. Ratios are a valuable tool for such interest groups, giving them the opportunity to assess companies in a standardized manner using widely accepted parameters.
It is usually a very subjective process to try and compare companies of different sizes, geographical locations, fiscal jurisdictions, and nature. Ratio analysis provides a level playing field by laying emphasis on performance rather than absolute size of turnover or profit. Efficiency, profitability, and liquidity are more or less independent of the absolute size of the individual parameters involved, such as turnover, assets, profit, and liabilities.
Ratio analysis allows the comparison...