Question 1

Can a board of directors make a final strategic decision based solely on ratio analysis?

Accepted Answer

No, this would be a significant error. Ratio analysis provides essential quantitative evidence, but it is only one component of strategic choice. A robust decision must also integrate qualitative information from other analyses like SWOT (Strengths, Weaknesses, Opportunities, Threats), PEST (Political, Economic, Social, Technological), stakeholder mapping, and an assessment of the firm's core competencies. Ratios show the financial story, but not the whole story.

Question 2

If a company's ROCE is very high, does that automatically make it a good business to acquire?

Accepted Answer

Not necessarily. A high ROCE can be misleading. It might be inflated because the company is using old, fully depreciated assets. An acquirer might face huge, imminent capital expenditure costs to modernise these assets, which would drastically lower the future ROCE. A strategic evaluation must look beyond the single ratio to the age and condition of assets, market growth potential, and competitive landscape.

Question 3

Does a low gearing ratio always mean a company is in a strong position for a growth strategy?

Accepted Answer

While a low gearing ratio indicates low financial risk and significant borrowing capacity (which is good for funding growth), it is not a guaranteed sign of strength. It could also suggest an overly conservative management team that is failing to use debt effectively to finance value-creating projects. In a low-interest-rate environment, a business with zero debt may be missing a major opportunity to increase shareholder returns through sensible borrowing for expansion.

The use of accounting data and ratio analysis in strategic decision-making

What you need to know

The use of accounting data and ratio analysis in strategic decision-making