Ratio analysis in itself is not sufficient to provide a true idea of the worth of a company. Making management decisions based purely on ratio analysis may lead to errors and more serious consequences. Ratio analysis is a component of fundamental analysis that is used by companies to determine the fair value of the stock of a certain company. Investors also apply fundamental analysis for the same purpose to decide if they should invest in that company (McClure 2009). To decide whether to invest in a company or not, fundamental analysis is one of the main techniques applied by investors.

Fundamental Analysis is normally conducted using a top-down approach. The top down analysis is like an inverse pyramid, with the broadest economic environment at the top, and then comes the industry analysis and finally the analysis of the company in question. The Economic analysis is a study of the macroeconomic factors affecting the company, such as inflation, interest rates and employment. These factors are subjective and require sound professional judgment on the part of the investor. Social and political factors are also taken into account when conducting economic analysis. For example, if the country in question is Pakistan (the banks portrayed in this dissertation are Pakistani banks), the political scenario is currently very unstable and this factor will detract many risk-averse foreign investors (ASEA 2006, p. 1-2).