Ratio analysis | Objectives | Utility | Uses or Role

Ratio analysis serves the purposes of various interested parties of the financial statements. The interested parties are top management, shareholders, creditors, employees, government and tax authorities. With the use of ratio analysis, one can measure the financial condition of the business concern and assess as whether the condition is strong, questionable or poor. Here, how far the ratio analysis helps the interested parties presented below:

Various objectives, utilities, uses or role of ratio analysis for various parties like the management, Share holders / Investors, Creditors, Employees and Government are listed as follows.

Objectives, utilities, uses or role of ratio analysis

To Management:
1. Ratio analysis helps the management to assess the performance of the business concern and improve the management functions such as planning, coordination and control.

2. Some ratios are calculated for a number of years. These are working as guide to the management. Meaningful conclusions can be drawn from these ratios.

3. The financial strength and weakness of the business concern can be find out through calculating some ratios. It means that communication is facilitated by ratios.

4. If financial position is very weak, better co-ordination is formulated by the top management for improving efficiency.

5. Standard ratios can be used for finding variations or deviations. Such variations can be found by comparing the actual with the standards so as to take a corrective action at the right time.

To Shareholders / Investors:

1. The safety of investment is find out by the shareholders.

2. Long term solvency ratios ensure the growth of the business concern and possibility of getting back their investments.

3. Ratio analysis will be useful for deciding whether the present financial position warrants further investments or not.

To Creditors:

1. The ratio analysis ensures the payment at a specified time or not.

2. If the short term solvency ratios are in satisfactory condition, the creditors can extent credit facilities.

To Employees:

1. If financial position is strong, then, the employees are getting wages, salaries and perquisites in time.

2. They can get adequate financial increment and promotion in time.

3. There is a guarantee in employment.

To Government

1. The government can prepare the industrial policies on the basis of financial position information available from various units.

2. Various loan scheme with subsidies can be chalked out by the government.

3. The government can assess the economic condition of the nation.

4. The contribution of each industrial sector to GDP is also identified by the government.