Simply better accounting!
Hand over your accounting to a Treuhänder mit eidg. Fachausweis (Swiss fiduciary with Federal Diploma of Higher Education) in Zurich.
Analysis and interpretation
Interpreting ratios works best as a combination of comparison and context:
- Comparison over time: how has the ratio developed over several periods?
- Ensuring comparability: are booking logic, chart of accounts, accruals and deferrals, and presentation of the financial statements consistent over the years?
- Industry/peer comparison: where does the company stand compared with similar businesses?
- Root cause analysis: which operational drivers explain changes (e.g., margins, inventory build-up, accounts receivable turnover, investments)?
Examples of meaningful interpretation:
- Equity ratio: can indicate long-term stability, but should be considered together with the investment phase, growth and financing model.
- First-degree liquidity: shows short-term capacity to act, but is easily misunderstood without looking at cash flow, payment terms and liquidity planning.
- Return on sales: provides indications of efficiency and pricing power, but can be distorted by one-off effects or accruals relating to other periods.
A sound ratio analysis therefore also takes external factors into account, such as the market environment, competition, price pressure or seasonality. The goal is not “nice-looking ratios,” but transparency that supports decisions in management and planning.
Frequently asked questions about accounting ratios
How does the importance of individual ratios change as a company develops?
As a company develops, the importance of individual accounting ratios shifts significantly, in line with the priorities and challenges arising from its current situation and goals. In the early stages of a company, liquidity ratios such as first-degree liquidity are often the focus, because short-term solvency and the company’s survival are of the greatest importance. With increasing growth and stabilization, profitability ratios and balance sheet ratios come to the fore, because aspects such as return on sales, return on equity and the equity ratio become decisive for assessing efficiency, long-term financial stability and independence from borrowed capital. Ratios relating to return on total capital and fixed asset intensity also gain importance, as they shed light on the sustainable use and management of assets. This development reflects how a company’s financial priorities shift from securing liquidity toward optimizing profitability and efficiency.
Can accounting ratios be used to predict financial problems?
Yes, accounting ratios can be used effectively to predict financial problems. By carefully analyzing liquidity ratios such as first-degree liquidity, companies can identify liquidity bottlenecks early that point to short-term payment difficulties. Likewise, changes in profitability ratios such as return on sales or return on equity signal potential problems in the company’s earning power. A continuous decline in return on total capital can indicate inefficient use of the capital employed and long-term financial instability. Balance sheet ratios, in particular the equity ratio and fixed asset intensity, shed light on indebtedness and the risk of financial leverage. These ratios therefore serve as early warning systems by revealing trends and deviations that point to upcoming financial difficulties or a deteriorating financial health of the company.
How do industry standards influence the interpretation of accounting ratios?
Industry standards play a decisive role in interpreting accounting ratios, as they serve as a basis for comparison when assessing a company’s financial performance and stability. They make it possible to analyze a company’s profitability, liquidity and balance sheet structure in the context of industry-specific norms and averages, so that return on sales, first-degree liquidity and the equity ratio can be assessed relative to similar companies. These standards also help to interpret fixed asset intensity and current asset intensity correctly by taking into account the capital commitment and investment behavior typical of the industry. Industry standards thus ensure that ratios such as return on total capital and return on equity are not analyzed and assessed in isolation, but allow a sound assessment of the company’s position in the competitive environment.
How can digitalization improve the analysis of accounting ratios?
Digitalization and the use of accounting software can considerably improve the accuracy and efficiency of analyzing accounting ratios. Modern tools enable automated data capture and processing, which leads to faster and more precise analyses. In addition, digital solutions can detect trends and patterns in the data that are difficult to identify manually.
To what extent do international accounting standards influence accounting ratios?
For most Swiss SMEs, it is not IFRS that applies, but the accounting law of the Code of Obligations; legal entities as well as sole proprietorships and partnerships with sales revenue of CHF 500,000 or more are required to keep accounts. International accounting standards such as IFRS (International Financial Reporting Standards) influence how assets, liabilities, income and expenses are recognized and reported, which directly affects the calculation of ratios such as the equity ratio, return on sales and liquidity ratios. By harmonizing financial reporting, they improve the comparability and transparency of financial information across national borders. International accounting standards consequently enable investors and other stakeholders to better assess the financial position and performance of companies at a global level.