Abstract
This chapter discusses the uses of financial ratios. Financial ratio analysis aims to provide a useful, if sometimes rough, analytical tool, which can be used for diagnosis, planning, and controlling business performance. The chapter discusses the application of fault-finding pyramid presentation in financial ratio analysis. Once the pyramid structure is understood, it forms a useful framework for diagnosing financial troubles and also for planning and for control. The concept also aids in financial analysis via interdivision or interfirm comparison. If ratios between comparable units are compiled on a consistent basis and structured in the fault finding pyramid concept, much can be learned of the comparative strengths and weaknesses of each unit. A number of organizations offer such schemes of interfirm comparison; the major problem to be overcome is that of ensuring genuine comparability both between the basis of computation of the ratios used and between the firms being compared. The pyramid concept can also be applied equally to ratios calculated for shareholder satisfaction.
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