Usefulness of Accounting Ratios in Financial Analysis

invoice ratios are a technique normally adopted by m sensationtary analysts in order to high soft the pecuniary health of the smart set at hand. There are a vast number of accounting ratios, separately of which outlines certain aspect of the organisation.The main areas normally considered are the financial performance, financial fix and financial st talent of the corporation. In this respect it is imperative that one first classifies the ratios in accordance with the aforesaid categories. In this respect, the ratios that portray the financial position of SR construction proceeds especial(a) are authentic ratio, savage test ratio, stock turn everyplace, debtors days and credit ratio.Ratios are a static figure, which on its own merits is meaningless to the financial analyst. Therefore it is of the essence(p) that much(prenominal) figure is either compared in the same organisation over time or with a company in the same or similar industry. The financial ratios of gentle B uild Limited are utilized in order to amplify the financial position of SR Building Service Limited. This will provide fruitful information on such facet.1.1 Financial Position of SR Building Service LimitedThe financial position of the company will be examined in three main areas. These grok the on the job(p) capital on a generic basis, followed by the commission of stock and debtors plus creditors. This will be conducted in the proceeding sections.1.1.1 on the job(p) Capital of SR Building Service LimitedThe capability of the current assets to scotch the current liabilities of SR Building Service Limited is inferior to the different company. This is revealed by the lower current ratio of the firm. The variance of 0.71 indicates that the short-term liabilities of SR Building Service Limited are in a higher(prenominal) proportion to the current assets. Such variable implies that worry is less sound in administering the working capital of SR Building Service Limited.Further m ore, the ability of the most liquid assets (debtors and cash and cash equivalents) to cover the short-term liabilities is excessively weaker than that of Easy Building Limited. This factor is outlined in the lower acid test ratio amounting to 0.38.It is therefore pertinent to state that on a generic perspective the financial position of SR Building Service Limited is worse than the other business entity. Further amplification of the fluidity of the company can be performed by examining in more tip the main current assets and current liabilities of the organisation. These encompass the analysis of the stock, throw debtors and trade creditors of the firm. Such examination will be performed in the forthcoming sections.1.1.2 wariness of StockThe stock turnover rate ratio portrays the number of times stock of the company is turned over. The higher such ratio the more effective is the management in the utilisation of stock. An organisation with a low stock turnover ratio normally imp lies that the company is stocking goods for a considerable time.This is a exceedingly risky element in light that the product may cursorily turn obsolescent realising a price lower than its original cost. For example, stocking a lot for retailers of clothes and electronic equipment namely computer hardware is significantly risky. Clothes may easily turn out of fashion in the lead to the aforementioned effect, and technological advancements may quickly turn electronic goods into obsolete products. Indeed organisations like Toyota nowadays are adopting a Just in Time Inventory System. Such technique encompasses keeping stock to a minimum, normally zero level.In light of the above, SR Building Services Limited surpasses Easy Build Limited on the stock facet. At this pegleg one would thus ponder the reason why the overall working capital of the firm at hand is weaker in comparison to Easy Build Limited. The proceeding examination may shed further light on such matter.