By expressing profit in relation to some other measure the probles of scale is eliminated. A business with a profit of £10,000 and a sales turnover of £100,000 can be compared with a much larger business of  £80,000 and a sales turnover of £1,000,000 by the use of a simple ratio. The net profit to sales turnover ratio for the smaller business is 10% (10,000/100,000 X 100% ) and the same ratio for the larger business will be 8 percent (80,000/1,000,00 X 100%). These ratios  can be directly compared whereas comparison to the absolute profit figure would be less meaningful. They need to eliminate differences in scale through in scale through the use of ratios can also apply when comparing the performance of the same business over time.

Calculating a realtively small number of ratios, it is often possible to build up a reasonably good picture of the position of the performance of a business> Ratios are used by those who have an interest in business and business performance. Ratios are not difficult to calculate but can be difficult to interpret.

Ratios are not only the starting point for analysis, they help highlight financial strengths and weaknesses. Ratios can be expressed in various forms. , for example as a percentage, as  a fraction, as a propotion. There is no accepted list of ratios which can be applied to the financial statements, nor is there a standard method of calculating many ratios. Variations in both choice of ratios and their precise defination will be found in the leterature and in practice. It is important to be consistent in the way which ratios are calculated for comparison purposes.

Ratios are grouped in profitability, efficiency, liquidity, gearing and investment.

The key steps in financial ratios analysis are to identify uses and their information requirements, select and calculate appropriate ratios and interpret and evaluate the results.