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

With reference to Ratio List