Different ratio methods are used in order to develop a specific set of information. For example, liquidity ratio will provide the user the ability to see if the organization can pay its short term financial concerns. This equation is:
current ratio =current assets/current liabilities.
When using ratios, it is important to note that a few precautions need to be taken to reduce erroneous numbers. This includes ensuring that the compared organization is indeed a competitor of the company. Ratio’s should not be taken as concrete information but as guides. The last concern is that the ratio’s are only as good as the data they are provided. GIGO should be understood (garbage in garbage out).