ratio analysis

Nearly everyone has compared two okada riders, two churches, or two jollof recipes without writing a single number down, just by considering what came out against what went in. Ratio analysis is that same instinct, dressed in a suit and let loose on a company's accounts.

Instead of staring at a single figure like profit of ₦50,000,000 and deciding that sounds impressive, ratio analysis asks what that profit cost to produce. A shop that made ₦50,000,000 profit on ₦100,000,000 in sales is doing something very different from one that made the same profit on ₦2,000,000,000 in sales. The naira figure alone flatters the second one. The ratio tells the truth.

In Lagos, a bank analyst deciding whether to extend a loan to a manufacturing firm will more than look at the firm's revenue. They will divide profit by revenue, debt by equity, current assets by current liabilities, and study what those small fractions whisper about the firm's discipline and its risk of default.

In London, the same habit shows up when a shareholder in a listed company checks the annual report before adding more shares to their portfolio, comparing this year's numbers to last year's and to a rival firm's, because a ratio only means something when it is placed beside another ratio.

For someone in the diaspora sending money home to help start a small business, ratio analysis is the calm check that stops hope from becoming the only strategy. It turns a feeling of things are going fine into a number you can actually defend.

The beauty of ratio analysis is that it does not need complicated maths, just the discipline to ask what one number means next to another, again and again, until a pattern of the business's true character starts to show itself.