Value of Ratio Analysis in Decision-Making

Value of Ratio Analysis in Decision-Making
The value of ratio analysis in decision making is unconscionable in an organization.   Ratio analysis assists the organization in identifying investment opportunities, generate, and   validate   better ideas. It provides the organization measures to assess multifarious aspects of operational success or failure. Presented in this paper are: concept/purpose of ratio analysis, ratio analysis major groups, calculations/financial analysis of Patton-Fuller Community Hospital, and factors considered in analysis results interpretation.
Concept/purpose of ratio analysis
Ratio Analysis is a method of analyzing the financial condition and working performance of an organization based on ratios calculated from the line items found in the financial statements, a component of financial statement interpretation. Comparison yields insights into the organization’s financial success.
Abraham (2006) stated, “The extent of financial performance by ratio analysis helps identify organizational strengths and weaknesses by identifying financial variances and focusing attention on issues of organizational importance” (p. 212). Ratios describe the various connections among accounts in the balance sheet and financial statement. Financial ratios save expected income.   Financial statements use analysis of ratio information in generating estimates.   They are significant to an organization’s finance status because they reflect the financial profile of the organization.

Major Groups of Ratio Analysis    
            Common size ratios compare financial statement numbers relative to the size of the organization. Cash ratio indicates the ability of the organization to meet   liabilities and liquidity ratios. Current asset ratio indicates the efficiency of the organization’s ability to convert   product/service to cash. A ratio of less than one suggests inability to meet obligation (Findler, 2011).

            Liquidity ratios compare the...