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The Analysis and Use of Financial Ratios: A Review Article
Author(s) -
Barnes Paul
Publication year - 1987
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1987.tb00106.x
Subject(s) - citation , management , accounting , library science , finance , economics , computer science
Financial ratios are used for all kinds of purposes. These include the assessment of the ability of a firm to pay its debts, the evaluation of business and managerial success and even the statutory regulation ofa firm's performance. Not surprisingly they become norms and actually affect performance.' The traditional textbooks of financial analysis also emphasise the need for a firm to use industry-wide averages as targets (Fouike, 1968), and there is evidence that firms do adjust their financial ratios to such targets.^ Whittington (1980) identified two principal uses of financial ratios. The traditional, normative use ofthe measurement ofa firm's ratio compared with a standard, and the positive use in estimating empirical relationships, usually for predictive purposes. The former dates back to the late nineteenth century and the increase in US bank credit given as a result of the Civil War when current and non-current items were segregated and the ratio of current assets to current liabilities was developed (Horrigan, 1968; and Dev, 1974), From then the use of ratios both for credit purposes and managerial analysis, focusing on profitability measures soon began. Around 1919 the du Pont Company began to use its famous ratio 'triangle' system to evaluate its operating results, underpinning the modern interfirm comparison scheme introduced in the UK by the British Institute of Management and the British Productivity Council in 1959,