Elements of The pyramid of ratios:
Left side ~ External rate of returns
Right side ~ Internal managerial performance
Bottom ~ Sales Ratios
Principle:
Illustrate the relation and calculation principles of Key Ratios
Issues:
Short term’s (short term optimization vs long term strategy)
Past orientation (future change influence)
Measurement problems (accounting standards, policies and creativity)
Strategies are often assessed on achieving a specific profit level or growth, RONA, ROE or Value however – Specific ratios are reliant of accounting convention and policies
Applications:
To make meaning compare to – historical trend, competitors, industry or country average
- Used to make comprehensive appraisal of corporate and managerial levels
- Used by management focusing on profit generated from assets within its control.
- Used to trace down the reasons for profitability level
Source of The pyramid of ratios:
Henley Business School