Evaluate the adequacy of accounting ratios as a means of monitoring business health in a selected organisation, using examples.

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D2: Evaluate the adequacy of accounting ratios as a means of monitoring business health in a selected organisation, using examples.

The importance of ratios in any business is vital because it gives the business a better understanding of the financial data. By using ratios we can compare data from the current year with the previous years, from this the business will identify if they are making more profit or a loss of if they just broke even.

There are four types of ratios that a business has to calculate:

* Investment ratio

* Financial ratio

* Profitability ratio

* Utilisation ratio

Investment ratio:

This ratio is usually used when investors want to invest in an organisation. The ratio calculation that they find normally consists of the performances of the businesses and if investing is a good idea or not in that business. Then the shareholders fund the company, and it is likely that they will get more investors and grow bigger if the business is in profit. Ordinary shareholders are who in fact owned the business and they are the ones that take the risk of accepting the money from the shareholders