Inany business unit, sustainability demands effective planning andincorporation of financial management strategies in order to achievethe desired goals and objectives. Calculation of financial ratios andanalysis is a very useful strategy that aspires to improve theunderstanding of the company’s financial performance, as well asthe current trends within a specified time. This means the ratios actas indicators to organizational growth and development(Jafarinejad,Surendranath,& Thanh, 2015).The management makes use of financial ratios to analyze some of theweakness and strengths of the company with an aim of developingstrategies for improvement. The funding institutions, individuals,and other investors make use of financial ratios in deciding whetherto commit funds to an organization. If the ratios are positive, itmeans the management is doing well whereas the reverse is true incase the ratios are negative. To this extent, an analysis offinancial ratios indicates a better corporate health (Aabo,Pantzalis,& Jung,2015). Ratiosare interpreted in the proper context whereby a consideration ofequally important factors and indicators is critical. A ration has tobe viewed at a within a specific time, as well as an indication ofbroad trends over a long time. The major use of a ratio is internalbenchmarking and setting of both short and long-term goals.Calculation has to be consistent from one period to the other failureof which the usage of the results is invalid(Dinuja, &Parmod,2015).The calculation has to utilize only reliable and accurate financialinformation whereby the data is a true reflection of the cost pictureof the organization. If the results of the ratios are negativeconsistently over a long time, the investors will definitely shyaway, as negative results indicate mismanagement and inefficiencies.In case the results are positive, investors are encouraged to pumpmore resources because they are assured of returns.
Aabo,T., Pantzalis,C., & Jung,C. (2015).Multinationality and opaqueness, Journalof Corporate Finance, 30(2),65-78.
Dinuja,P., &Parmod,C. (2015).Issues in the adoption of international financial reporting standards(IFRS) for small and medium-sized enterprises (SMES). Advancesin Accounting, 31(1),165-180.
Jafarinejad, R.,Surendranath,R., & Thanh, N. N. (2015).The effects of institutional ownership on the value and risk ofdiversified firms. InternationalReview of Financial Analysis, 40(1),207-220.