Accounting and Financial Reporting, Risk Assessment

Ratio Analysis, Simplified

Page from GFR

Financial ratios are a valuable tool for analyzing an organization’s financial condition. While the 10-point ratios and their extensions continue to provide the foundation for much of the discussion on the subject, the methodology underlying the approach has an important weakness: it is heavy on data requirement, which could be extremely time-consuming. Also, the choice of the scale—as used by Ken Brown and subsequently by Dean Mead—to determine the overall financial condition of a government needs further refinement.

In this article, we develop a composite measure, an index, based primarily on Mead’s ratios, that is simple and easy to analyze and interpret