Use of Financial Ratio Analysis as a Benchmark Tool

The investors on the other hand want to ascertain themselves that their investment to the firm will yield profits, while the government requires it for taxation and legislation purposes. ”(Cunninghum, 1993). Benchmarking refers to the process through which firms compare their current performance with either their past performance or with the top performing firms in the same industry. There various techniques of financial performance benchmarking that include: ratio analyses benchmarking. The amount of leverage of a firm refers to the amount of debt acquired for financing the firm’s activities. 0 signify sturdy financial position. The firm should compare its working capital ratio with those of competitors. In case of a gap, it should seek to find out the underlying cause for that gap and how to resolve it.

“(Johnstone, 2009) In measuring efficiency, the inventory turnover ratio valuated is compared to that of other firms in the industry. The rate of turn over varies per industry, with manufacturing have a significantly lower ratio of 6. Return on equity is a ratio that is calculated by dividing net income by shareholder’s equity. It shows how profitable shareholder investment in the firm is. Firms with higher return on equity tend to attract more investors as investors main goal is maximizing wealth. The following are stages undertaken in benchmarking; selecting the subject, in this case, the subject is financial performance. Then developing the procedure to be followed during the benchmark. Ratio analysis is one of the most effective ways of benchmarking a firm’s current financial performance against its historical performance in the past three years or more.