False. Ratios can be manipulated by management, and different accounting rules can result in different values for the same ratios.
A ratio is the relationship between two figures that are comparable. The figures may be absolute, such as two numbers, or relative, such as two percentages. Ratios are useful in business because they can be used to compare two figures that are not directly comparable. For example, two businesses can be compared in terms of profitability, even if they operate in different sectors and use different accounting standards.
Ratios are useful in business decision making because they can be used to help managers identify trends and set targets. For example, if a company’s sales volume has increased by 20 percent over the last 12 months, this is not particularly useful information in itself. However, if the company’s inventory turnover ratio has also increased by 20 percent, this is a very useful trend because it indicates that the company’s inventory is being sold at a faster rate. The trend may indicate that the company is becoming more efficient in its operations, and managers may decide to set a target to increase inventory turnover to a certain level.
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