'Ratio Analysis' - A re-look

Perhaps one tool for analysing the financial performance of a firm, that we have all been teaching/learning for years together is the 'Ratio Analysis'.  No course on finance is complete without adequate coverage of the above tool.  But off late, I am finding something strange the way we teach this at the MBA programmes.  Our coverage on Ratio Analysis includes liquidity ratios like current ratio; asset efficiency ratios like total assets turnover; profitability ratios like gross margin and, ROI; and long-term solvency ratios like debt-equity ratio.  Most of the standard text books provide in-depth coverage of these ratios.  And, a student goes out of the course believing that these ratios are applicable universally across all types of companies and in all types of sectors.  Nothing can be more misleading!!  We should remember that most of the popular text-books were written at a time when financial performance analysis (in the Indian context) meant analysing firms involved in manufacturing.  That was a time when banks followed a highly conservative accounting system and did not disclose much; there were only public sector insurance companies and they did not disclose their accounts; except UTI, Mutual Funds were non-existing and no-stock broking firm was ever a public limited company.  Hence the scope of financial statement analysis was limited to companies involved in manufacturing.

But, today we are living in a world where we are surrounded by the financial statements of different types of companies engaged in different types of businesses.  Most of the companies upload their entire annual report on their website.  But our text books continue to teach 'Ratio Analysis' from a manufacturing firm's perspective and our curriculum prescribes the same.  So, we teach the same and the students believe that a tool which was developed (or suitable) for analysing firms engaged in manufacturing can be applied universally across industries.  Even-though the industry and industry-analysts have developed various ratios appropriate for analysing their financial statements, they have not found a place in the MBA curriculum.  I strongly believe that the time has come when the focus of a course on Management Accounting should move away from preparation of financial statements (which anyway is the job of an accountant and not that of a manager) to in-depth analysis of the same.  The teachers have to acquaint the students with the financial statements of companies from various industries and teach them appropriate 'Ratios' for analysing these statements. We may not find text books containing this, but that is the challenge that we, the teachers have to take.