Final answer:
The benchmark sheet is what provides guidance on expected values when performing ratio analysis. It is used as a reference point to compare financial ratios against historical data, industry averages, or target goals to assess the financial performance and health of a company.
Step-by-step explanation:
The benchmark sheet provides basic guidance on where the ratio result should fall when applying ratio analysis. When conducting financial analysis through ratios, it's imperative to compare the calculated figures against some standards or benchmarks to determine the financial health or performance of the entity in question. This kind of analysis is essential for stakeholders, including investors, creditors, and management, to make informed decisions.
Typically, these benchmarks could be historical ratios for the company, average ratios within the industry, or target ratios set by management. They act as a reference point that can highlight variances that might require attention or action. For example, a common ratio is the current ratio, which is a liquidity ratio that measures a company's ability to pay short-term obligations. The benchmark for this ratio might vary from industry to industry, but a common reference point is that a current ratio of 2:1 is considered healthy.
Another example is the debt-to-equity ratio, which is a leverage ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Again, the ideal benchmark would vary, but a lower ratio generally indicates less risk. These ratio analyses help organizations maintain financial stability and achieve strategic goals.