Performance ratios - Why are these used?

Accounting and financial management have often been regarded as the most complex aspects of managing a business. The numbers are usually big, the formulae confusing and there are so many regulations. It is fine for the Director of Finance/CFO and his/her team but what about the other stakeholders, especially average investors and the managers actually running the show. How can they ensure that their investment is safe or their performance is in line with organizational goals?

Hi Robert,

As I see it then accounting and financial management is one of the most simple aspects of managing a business, as you can basically learn it all in collage. Something real like sales or product development is different. That’s the really complex part that you cannot learn or simply read a book about.

And it doesn’t really if we talk about a big or a small company, or big or small numbers. The principles are exactly the same.

So the only difference is really that the requirements toward the big company is bigger, because you need to make the numbers visible and clear to the other managers and their investors.

Investing in a company is really a matter of trust. I think the resent years American business history shows it very clear, all the mambo jambo of financial analysis, performance numbers etc. is worth nothing. Everybody can show beautiful numbers to its investors if they want. Everything is just a matter of trust.

Otherwise an interesting question! But somehow I was really expecting that you would just tell us all that you had this or that great tool who could do it all for us. I’m sorry but I don’t believe in it. No matter what that product it is. I have seen many companies buy “great” bi solutions or analysis tools, because a good sales person told them about it. If you think that accounting and fm is complex, then no tool will help you. But if you can tell me that I’m wrong, then I would love to hear why.

On a light note : Avoid happiness by noticing inflated P.E. as the big figures can be and are (not always) manipulated.

Knowledge of fundamentals of the organization as well industry should be good e.g. we never thought that Oil prices may come from $147 to $40 barrel. First of all, except few fin geeks nobody thought that it will reach 147 and then will come back to 40s again. Many people went in when prices were 100+ and did exist when they predicted that it is over, they were safe. And an amateur investor thought Oh it is natural resource nothing will happen to it and entered @100 level and (now no exist, if did then bankruptcy ) v can see what happened to them.

So investment is combination of as Erik rightly said trust and i would add basic awareness of at least why i am investing and when. As far as about people running the show believe me people will keep coming in and going out.

To an organization it doesn’t matter i have never heard some big boss left or people running the show and some company shut it doors. Read this and then search for it’s owners thoughts about investors. And after going through his thoughts u will be surprised , people still want to invest.[:D] and that makes sense as well.

Hi Erik,

Financial ratios provide a quick and comparable view of the performance of a business - by using financial ratio analysis, a lot of seemingly complex and overwhelming accounting information and year-end reporting can be made easy to comprehend. It may not be easy to adjudge the performance of a company over a period of time, say over five years or compare the same with a competitor or industry peer by looking at the year-end reporting, at least for an average investor. However, the use of financial performance ratios makes this possible. Financial analysts at business channels and newspapers use these to recommend one stock over the other. Stakeholders and the Board keep a close watch on these in order to ensure that the management is doing its job properly.