Why do decision-makers analyze financial statements and how is ratio analysis useful in the process?
For both internal and external users, financial statement analysis techniques enhance the usefulness of the information contained in the financial statements. For example, investors and creditors use financial statement information to make decisions about whether or not to provide a company with debt or equity financing. The management team of a company is concerned with these issues as well as issues related to the overall performance of the company. Ratio analysis provides additional information necessary to enhance the decision-making ability of the users of the information. Ratio analysis can indicate how the company performed in the past, and this information is often used as a prediction of future performance. In addition, ratio analysis makes it easier to compare companies of different size to each other.
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