Some Basic Properties of Accounting Ratios

Almost every text-book on accounting has a section describing the use of accounting ratios in the interpretation of financial accounts or management accounting data. The discussion typically concentrates on the detailed definition of ratios and the relevance of alternative definitions to different uses rather than on the reasons for using ratios in preference to other statistical devices. ¹ There is also a growing body of empirical literature which studies the statistical distributions of, inter-relationship between, and predictive content of accounting ratios, ² but in this literature also, it is customary to assume that the ratio is the appropriate statistical form for summarising the data, without explaining what assumptions are necessary for this to be the case.