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

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Abdul Rana

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 because they would have to pay back the shareholders if the business goes in loss and they may have to shut down.

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I do not think that having shareholders in a business is good, because the business doesn’t stay yours.  You will be funded by the shareholders however you will have to give the shareholders back a percentage of money in a limited period of time or by giving them the payments in months. Once the share holders have got all their money back as they have a share now in your business you will still have to pay them. So therefore it is a bad idea to have a shareholder unless you run out of options.

Profitability ratio:

This ...

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