Abstract The article discusses about some empirical bases of financial ratio analysis. Their statistical nature, as described in this article, suggests that they may not be so simple device as has been assumed but a more precise and larger body of knowledge about ratios will help surmount this difficulty. It would be extremely useful to explore the question of the predictive ability of financial ratios further. A sharper determination of their predictive ability should be possible because computers will allow for a greater usage of non-aggregate data and more sophisticated statistical techniques. Also, the development of funds flow ratios should be promising in this regard. An efficient predictor of financial difficulties would be a valuable device for screening out undesirable investments; indeed, it would be a useful device for selecting investments if one were interested in selling short. However, there is even a more fundamental reason for determining the utility of financial ratios. It is inconceivable that accounting data can be analyzed without transforming it into ratios, in one way or another; and thus, a justification of financial ratios would also be an important justification of financial accounting.
James O. Horrigan (Thu,) studied this question.