Ratios are used in the following ways by managers in various firms.
1. Evaluating the efficiency of assets utilisation to generate sales revenue i.e turnover ratio.
2. Evaluating the ability of the firm to meet its short term financial obligation as and when they fall due (liquidity ratios).
3. To carry out industrial analysis i.e compare the firm’s performance with the average industrial performance of the firm with that of individual competitors in the same industry.
4. For cross sectional analysis i.e compare the performance of the firm with that of individual competitors in the same industry.
5. For trend/time series analysis i.e evaluate the performance of the firm over time.
6. To establish the extent which the assets of the firm has been financed by fixed charge capital i.e use of gearing ratio
7. To predict the bankruptcy of the firm i.e use of selected ratios to determine the overall ratio usually called Z-score. The Z-score when compared with a pre-determined acceptable a Z-score will indicate the probability of the bankruptcy of the firm in future.