Question 10.A.1: Review the main areas for which ratios can typically be usef...
Review the main areas for which ratios can typically be usefully calculated, and explain the advantages of the three bases for comparison (i.e. past periods, similar businesses and planned performance).
The first part of your answer should be along the lines covered in the section on financial ratio classification. The second part should reflect the section headed ‘the need for comparison’. The advantages of each method are largely related to he purpose for which the analysis is required. Past periods provide a good basis for comparison if the analysis is aimed at assessing progress over time. Similar businesses provide an opportunity to compare and contrast performance with a range of competitors and learn from others. Planned performance is likely to be really important in an internal analysis focused on improvement and progress. It is unlikely that enough detailed figures would be made available for a general purpose analysis for outside stakeholders.