The Role of Accounting Ratio Analysis in Business Decision Making

This article discusses the importance of accounting ratio analysis in making business decisions. It reviews research studies conducted by Damjibhai, Brown, Ak, and Daniel and highlights the common themes and findings across the four articles. The limitations and future research directions are also discussed.

Business research Methodology 1
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Assessment 1: Structured Abstract
This structured abstract, review the study of the responsibility of accounting ratio analysis in
taking business decision, through research studies conducted by Damjibhai, Brown, Ak, and
Daniel,
Summary of the theory and progression in the field
Damjibhai, (2016), stated that ratio analysis was developed long ago. Ratio analysis
was mainly used in analyzing ratio properties. Damjibhai, (2016) further states that ratio
analysis was mainly used in the modern times as tools of analyzing financial statements. In
the 19th century, ratio analysis was also used to represent the financial power of an institution
and make adjustments in the management. The major purposes of financial analysis are
managerial and credit. Damjibhai, (2016) confirms that the main focus in managerial
approach is profitability while in Credit is ability to pay the debts. In most cases, ratio
analysis is used in credit analysis.
Damjibhai, (2016), says that business relationship is portrayed through ratios.
Damjibhai, (2016), also developed a complete model based on the ratios. Although, this
model is not mature it gave others an opportunity to work on this theory. Since ratio analysis
was a big issue several people criticized its concepts.
Damjibhai, (2016), had several concerns about this issue. First, he says that ratios are
bound with time and are always changing thus difficult to interpret. Second, ratios cannot be
used to judge a company’s performance. Third, ratios have an effect on a viewer’s mind and
can easily hide the real position of an organization. Fourth, ratios change regularly and will
affect dependability. To solve the criticism Damjibhai, (2016), created and promoted
successful financial ratios. These ratios were printed and have then been known worldwide to
be the best.

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Damjibhai, (2016), further analyzed a hundred and twenty failed firms by using 13
different ratios. Out of the thirteen, three forecasted the failure of the firms accurately while
others showed some predictive power.
Also, Damjibhai, (2016), made use of eleven ratios to determine if successful firms
had higher ratios than unsuccessful ones. Though this study was not mature, that aspect was
ignored by looking at the contributions the study had on the assessment of how useful the
ratios were. Later on, exchange in commission and security was developed. This helped
expand the flow of the financial statements as well and the number. This also helped enhance
and realize the vitality of the ratio analysis.
In the 19th century, financial information and knowledge rapidly expanded.
Damjibhai, (2016), also made comparisons of related items and then linked assets and
liabilities. Other ratios were also compared. Current ratio was the most important ratio at that
time when compared to other ratios. DuPont analysis was used in analyzing the operational
results. The results were then partitioned into three portions then this was compared to other
companies in order to highlight the problems and the stronger business areas. In many
different enterprises, process of making decisions is the most fundamental in managing all
enterprise operations. These enterprises may be profit-oriented or non-profit oriented. The
research made was for profit-oriented firms where decision making process is based on the
different concepts. Among the concepts in these enterprises is the accounting ratios that
should have a huge effect.
In the decision-making process, financial reporting is the main concept. According to
Damjibhai, (2016), financial reporting is not the main information in a business but it
provides the necessary information in business making processes and economic decisions.
This is why the Damjibhai, (2016), was so much keen in determining the extent to which

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management dealers depend on the accounting ratios. It is therefore good to say that financial
statements have a huge effect on investment decisions. They help provide investors with
information about project analysis, performance of a company financial and the position of a
company financially.
Common themes/findings across the four articles
Damjibhai, (2016), says that, decision making process is such a vital issue in any
institution. Presence of valuable information is one of the hypothetical evidence of good
decisions. Accounting systems and financial statements provide this information. Financial
statements provide the realistic information about a company. Proper auditing of the financial
statements must be regularly done to ensure accuracy. Different financial statements users
should be able to read and comprehend the information from the financial statements. Ability
to read the financial reports will provide different ways and procedures in comprehending
business operations. Brown, (2008) states that good and well-organized financial statements
and information is assumed to provide an efficient business.
Different themes/findings
Ak, (2013) says, financial reports help obtain information about company’s financial
position in the past and the present. They also help make those events not perceived much to
be visible. Additionally, they provide general summary of the company and help management
anticipate for the future events. Information about finances must be relevant, intangible,
comparable and reliable so that it can be deemed as useful. Decision making process does not
only rely on the information obtained but also on the representations and personal beliefs of
people.
Discussion of Limitations
According to Brown, (2008) ratio analysis was developed to do quantitative/
comparison analysis on the figures of financial statements. Ratios help create a link between

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three different statements and provide figures that can be compared between companies and
industrial sectors. It is therefore one of the most widely used tool in making analysis in firms.
Daniel, (2015), used secondary data in conducting the qualitative evaluation of accounting
ratio analysis. There was no use of primary data. He also confirmed that his research was
unsuccessful due to lack companies that apply extreme accounting ratios. Additionally, this
research depended on a place in this case Wilmington in the USA was where the study was
conducted. Several challenges were encountered during the research. There were
methodological problems too that were faced (Damjibhai, (2016). The use of sampling led to
self-selection bias. It is important to note that the quantitative methodology had a lot of
limitations unlike qualitative methodology on sample selection approaches. Hence being
effective on a few samples.
These ratios vary from different industries and comparisons between some companies
might at all be not true. Trends in the financial ratio analysis must be adequately analysed
instead of looking at single figures in financial reports.
Future research directions
Daniel, (2015), stated that financial reports and statements contain so much
information that is sometimes in figures. These reports may not provide all the information
regarding how viable the figures are. Hence, analysis must be done in order to obtain some
comparisons and better decisions. Financial ratios are suitable in doing that. In these articles,
ratio analysis helped in revealing, comparing and interpreting the striking characteristics of
this financial reports or statements. According to Daniel, (2015), accounting ratio analysis,
help show the financial position and performance of an organization. They also help show
results of company operations and identify weaknesses and strengths in a company. They
help show the past, present and future performance of an organization. They enable us
understand our business and make proper assessments in obtaining rigid and more concrete

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answers. Ratio analysis will actually help in planning, forecasting and decision-making
processes.
Ratio analysis are essential in making anticipations of the company’s performance.
Therefore, when conducting ratio analysis, it is significant to reduce errors, this helps
increase efficiency in the companies. Inefficient ratio analysis combined with the reduces
errors will help enhance accuracy in the business operations. Damjibhai, (2016), suggests that
financial statements users must have adequate knowledge of accounting. Investors should
also adequately analyze the financial statements before making decisions.
Bibliography
Ak, B. K., 2013. The use of financial ratio models to help investors predict and interpret
significant corporate events. Australian Journal of Management, 38(3), pp. 10-29.
Brown, R., 2008. Financial statement analysis and accounting policy choice: What history
can teach us. Journal of Applied Accounting Research, 8(3), pp. 2-10.

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Damjibhai, S. D., 2016. Performance Measurement through Ratio Analysis: The Case of
Indian Hotel Company Ltd. Journal of Management Research, 15(1), pp. 5-19.
Daniel, G. A., 2015. A Consensus on Commonly used Financial, Romania: West University
of Timișoara.