Using ratios helps managers set targets because:

Using ratios helps managers set targets because ratios can normalize performance figures. This means that ratios take into account various factors such as size, scale, and market conditions that might otherwise skew a direct comparison of performance. By normalizing data, managers can gain a clearer, more standardized view of how a company is performing relative to its goals or against its competitors.

For example, comparing the profitability of two businesses of vastly different sizes can be misleading if only raw profit figures are reviewed; a ratio like return on equity provides a more accurate assessment of efficiency. This normalization allows managers to establish realistic targets and benchmarks, as they are judged on a level playing field rather than raw figures that may be influenced by scale or external factors. Thus, this ratio analysis is critical in strategic planning and target setting.