Application of Financial Ratios as a Firm's Key Performance and Failure Indicator : Literature Review

Scrutinizing the performance of the firm and its failure by using a set of financial ratio is of the significant interest of many researchers, financial analysts and investors. These ratios measure the performance of the firms and in turn also signal about the financial failure. Hence the financial ratio analysis is used as decision making tool by the financial decision makers but it is not prudent to rely totally on the financial ratio analysis because these ratios are affected by the seasonality errors, methods of assets evaluation and financial conditions of the countries where the firms are located. The key financial variables for assessing the performance of firm are the profitability ratios and the liquidity ratios. The banks can also use these ratios as an indispensable decision making tool. But same set of financial ratios are not applicable to all type of businesses. It also plays a crucial role in the non-profitable organizations by promoting the stewardship behavior. From Empirical studies it is concluded that logit analysis is the superlative approach for forecasting the bankruptcy of the firm