If the companies differ significantly in size or

If the companies differ significantly in size or report the financial data in different currencies, it
is not useful for example compare the reported net income. Thus, the financial ratio analysis
enables to remove size as a factor and eliminates the requirement of translating the reported
currencies into a common currency, since the focus is on ratios. Also by using financial ratios,
examine of comparable performance over time is more accurate than using nominal currency
amounts. The horizontal financial statements where quantities are stated in terms of selected base
year value and graphs can make such changes more apparent. However, despite all the
advantages, financial ratios are calculated from financial statements, and the possible differences
in accounting standards may limit the comparability (Robinson et al. 2015) Even though the
standards are the same, there some other issues to deal with such as the use of historical costs
and inflation. Accounting data is not just adjusted for inflation; it represents historical costs

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instead of current or replacement cost for more assets. Therefore the reported book value might
not reflect with the market value or replacement value of a company's assets (Peterson, Fabozzi
2006). In addition, the more significant influences come from estimations such as residual value
estimation and useful life of assets.
The purpose of financial ratio analysis is to calculate adjusted financial ratios from timely
separated income statements and balance sheets in order to make accurate conclusions about
company’s financial operating condition based on the financial ratios. Usually, financial ratio
analysis measures the financial condition from two perspectives, firstly the amount of profits
company generates (profitability) and secondly the financing position (solvency & liquidity).
The company’s ability to growth can also be named as one figure that illustrates the financial
condition of a company. Growth is a specifically important factor when the valuation of a
company is focused on the future from long-term aspect and is based on the estimations of cash
flows received in the future (Salmi 2004,196).
The need for financial ratio analysis rises from various sources, and it can be utilized in various
ways. The main users of such information can be divided into three different groups. These
groups are investors, management of the company and the creditors of the company. Figure 2 in
below illustrates these groups, how the financial analysis can be utilized and their objectives.
Table 1. Users of financial ratios
Particulars Need Objective
Investors
valuation of
company
profitability,
risk & growth
analysis
Management efficiency
operating
performance,
solvency &
profitability
Creditors
ability to pay
debt
liquidity &
solvency
Source: Temte (2004, 75)
The equity investors are interested in the value of a company, thus they use the financial ratios
analysis to estimate the value. The reason is obvious; equity investors are seeking companies
with great growth potential or companies with good rates of return on investment, which in this