Ratio Analysis

A ratio is defined as  “the indicated quotient of two mathematical expressions and as the relationship between two or more things.” Here ratio means financial ratio or accounting ratio which is a mathematical expression of the relationship between two accounting figures.

Ratio Analysis on the basis of calculation:-

Ø  A relationship expressed in mathematical terms                                                                  

Ø  Between two individual figures or group of figures                                                             

Ø  Connected with each other in some logical manner                                                              

Ø  Selected from financial statement of the concern                                                                 

Ratios are that all the stakeholders can draw conclusion:-                                                                          

Ø  Performance (Past, Present and future)                                                                                 

Ø  Strength and weakness of a firm                                                                                            

Ø  Can take decision in relation to the firm                                                                                

Ratio analysis is based on the fact that a single accounting figure by itself may not communicate any meaningful information but when we expressed relative to some other figure, It may provide definitely some significant information.  It is comparing the number against previous years ( intra firm comparison) and other (inter firm comparison).

For the purpose of obtaining the material and relevant information necessary for ascertaining the financial strengths and weakness of enterprises, It is necessary to analyze the data depicted in the financial statement. The financial manager has certain analytical tools which help in financial analysis and planning. The main tools are ration analysis and cash flow analysis.

Advantage of Ratio Analysis  

                                                                                                           

To Evaluate the Performance:- Ratios provide the assessment of companies financial performance, enabling stakeholders to evaluate its profitability, efficiency, liquidity and solvency. By making comparison against industry benchmark, trend analysis, strength and weakness as well as company overall performance. 

Health assessment of finance:-Ratio analysis helps in assessing the financial health and stability of a company. It provides insights into the company ability to meet short term obligations and long term debt repayment capacity. This is important information for lenders, investors and creditors to determine the company worthiness and risk exposure.   

Identifying Strength and Weakness:- Rations help identify a company’s strength and weakness in particular areas of its operations. By pin point areas that need improvement, management can take exactly correct action to increase operational efficiency and profitability.

Benchmarking:- Ratios provide a basis for comparing a company financial performance with different industries, competitors or similar companies. Benchmarking assist stakeholders gauge how well  the company is performing relative to peers, identify areas of improvement and set realistic goals for future performances