The Role of Accounting Ratio Analysis in Measuring Financial Performance of a Firm and Aiding Investment Decisions
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Chapter one on The Role of Accounting Ratio Analysis in Measuring Financial Performance of a Firm and Aiding Investment Decisions
INTRODUCTION
Background of the Study
The financial statement of the firm at the end of the annual year provides a more significant tool of analyzing information to facilitate in making useful business and investment decision. This can be achieved through the use of accounting ratio analysis. Accounting ratios facilitates the determination of the performance and profitability of a firm which is fundamental for investment decisions based on the firm’s financial reports. Accounting ratio facilitate the comparison of two aspects of a financial statement some example of accounting ratios include the dividend ratio, gross margin ratio, debt-to-equity ratio, and operating margin ratio. The relevance of this ratio for investment decisions depends on the currency of the data in the financial statement. The statement used for accounting ratio analysis is the annual financial report of a firm which consists of three financial statements: the balance sheet, income statement and cash flow statement. The analysis conducted in each of this statement provides the vital information required regarding the financial performance of the firm for making sound investment decisions. Analysts therefor depend on the use of the financial statements to provide the data needed to update accounting ratios. According to Igben (1999:423), “Accounting {or financial} ratio consist of the fraction, proportion or percentage which compare the relationship between one variable item in a set financial statements with another item in the financial statements. Consequently, Accounting ratios are vital for the analysis and interpretation of financial statements”.
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