Role Of Ratio Analysis In Decision Making

This is the research project about role of ratio analysis in business decisions based upon the public limited companies of Pakistan. This first chapter discovers the research project framework of the study. The flow of this chapter begins with background of the study, statement of the problem, research objective, research question, scope of the study and is discussing about the significance of the study. (Saunders, Lewis and Thornhill, 2009)

1.1 Background of the study

In order to begin this research, it is important to know the overview of the research itself. It investigates the role of ratio analysis in business decisions for which we will look forward towards public limited companies to demonstrate the application of ratio analysis. There

The analysis of ratios gives an indication of how effective an entity is run, the financial earnings provided and the possibilities of financial insolvency. Besides the internal management, external parties use this analysis for decision-making purposes. Managers, creditors, the government, shareholders and investors, employees and auditors are some of the people who would find ratio analysis useful.

Moreover, Decision making is the main component of nearly all managerial activities carried out in all types of enterprises; both profit and non-profit orientated and public establishments. This research therefore looks at the effect of using ratio analysis in decision making. The research is conducted in public limited companies where decision making is influenced by various aspects among which ratios analysis should have a significant bearing. (Accountant, 2011)

Other than guiding current stock holders on whether or not they should dispose stock, ratio analysis also helps potential investors decide on whether they should invest in the company or not. Managers can also use ratio analysis to review operations for better performances in future because it gives an indication of the company’s areas of strength and

This information becomes useful once it is evaluated and interpreted using financial analysis techniques. Financial ratios, otherwise known as accounting ratios, are among the common and simple techniques that can be used (Prof. Harvey B. Lermack, 2003).In the modern business environment, which continues to grow more and more competitive, the survival of big or small firms is determined by the strategic decisions the management makes with the help of accounting ratios. This is however a big challenge to very many countries like ours that are experiencing a shortage of professional accountants. Looking at the problems mentioned above, this research will go into identifying the appropriate application of financial ratios and the role of ratio analysis in business decision-making. (Faculty.philau.edu, 2003)

Owing to these problems, the research will scrutinize the significance of financial ratios in evaluating companies’ performance for purposes of making decisions related to investment. Additionally, all the benefits derived from application of financial ratios will also be examined for correct investment