Thesis: Ratio Analysis and Financial Decisions

Sample Thesis Paper

Ratio analysis has a significant role to play in making business decisions. Earlier studies have shown support for the use of financial ratios. These ratios, according to the research fall into 7 categories (Chen and Shimerda 1981, p. 51-60). The study by Devine (1995) used forty four financial ratios to verify these dimensions and check the effect of these ratios on the activities in an organization. The findings of Devine (1995) suggested that there were a total of twelve dimensions rather than seven. These include leverage, turnover, capital ratios, etc.  The findings of Devine (1995) indicated that ratios in final statements have a very good chance to have an effect on decision making and there are great chances that further research will be conducted on the relation of ratio analysis and decision making.

There have been many researches on the relationship between Financial Ratio Analysis and decision making. Miller (1994) suggests that ranking models of customers to decide a sales strategy can be greatly enhanced by cause and effect ratio analysis (p. 27-29). In a study by Backer and Gosman (1980), respondents were asked about the value that financial ratios held in the decision making process. Most respondents answered that financial ratios held a medium to high level of importance but also warned against the sole usage of ratios and mentioned some very important factors besides financial ratios. These included the management in the respective firms of the respondents that is the level of expertise and experience of the management team in the company. Other important factors crucial to the decision making process as mentioned by the respondents included the prospects for the products and / or services of the company, meaning what the forecasts said about the future demand of the product and / or service and also the various factors affecting this demand. Another factor was mentioned that is note worthy that suggests the economic environment surrounding the product or service has impact on the outcome (p. 53).

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