Ratio Analysis

Ratio analysis is part of the financial analysis of a supplier, and may be undertaken as part of supplier appraisal, as part of a category plan or in negotiation planning. Using data from published financial statements such as the balance sheet and profit and loss statement, ratio analysis allows for comparisons between companies, or between the same company’s results in one year compared with previous years. Solvency ratios measure the ability of the firm to meet its debts; profitability ratios measure the firm’s use of its assets and its ability to generate an acceptable rate of return for shareholders, and management ratios measure the quality of management of inventory and control of accounts receivable. The information from ratio analysis rarely answers questions but may highlight where further questions need to be asked. The validity of analysis of published financial accounts has been undermined somewhat by scandals which have revealed how the information presented in published financial accounts may be manipulated. Such information should be seen as one part of a jigsaw, but should not be the only source of information used. See also Ratio, Current and Supplier Appraisal.