RATIO ANALYSIS
Meaning and definition of ratio analysis:
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the
strength and weaknesses of a firm as well as its historical performance and
current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two variables.
Significance or Importance of ratio analysis:
It helps in evaluating the firms performance:
With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of
the undertaking. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets correctly, to increase
the investor’s wealth. It ensures a fair return to its owners and secures
optimum utilization of firms assets
It helps in inter-firm comparison:
Ratio analysis helps in inter-firm comparison by providing necessary data.
An interfirm comparison indicates relative position.It provides the relevant
data for the comparison of the performance of different departments. If
comparison shows a variance, the possible reasons of variations may be
identified and if results are negative, the action may be intiated immediately
to bring them in line.
It simplifies financial statement:
The information given in the basic financial statements serves no useful
Purpose unless it s interrupted and analyzed in some comparable terms. The
ratio analysis is one of the tools in the hands of those who want to know
something more from the financial statements in the simplified manner.
It helps in determining the financial position of the concern:
, Ratio analysis facilitates the management to know whether the firms
financial position is improving or deteriorating or is constant over the years
by setting a trend with the help of ratios The analysis with the help of ratio
analysis can know the direction of the trend of strategic ratio may help the
management in the task of planning, forecasting and controlling.
It is helpful in budgeting and forecasting:
Accounting ratios provide a reliable data, which can be compared, studied
And analyzed.These ratios provide sound footing for future prospectus. The
ratios can also serve as a basis for preparing budgeting future line of action.
Liquidity position:
With help of ratio analysis conclusions can be drawn regarding the
Liquidity position of a firm. The liquidity positon of a firm would be
satisfactory if it is able to meet its current obligation when they
become due. The ability to met short term liabilities is reflected in the
liquidity ratio of a firm.
Long term solvency:
Ratio analysis is equally for assessing the long term financial ability
of the Firm. The long term solvency s measured by the leverage or
capital structure and profitability ratio which shows the earning power
and operating efficiency, Solvency ratio shows relationship between
total liability and total assets.
Operating efficieny:
Yet another dimension of usefulness or ratio analysis, relevant
from the View point of management is that it throws light on the
degree efficiency in the various activity ratios measures this kind of
operational efficiency.
Meaning and definition of ratio analysis:
Ratio analysis is a widely used tool of financial analysis. It is defined as the
systematic use of ratio to interpret the financial statements so that the
strength and weaknesses of a firm as well as its historical performance and
current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two variables.
Significance or Importance of ratio analysis:
It helps in evaluating the firms performance:
With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of
the undertaking. Ratio points out the operating efficiency of the firm i.e.
whether the management has utilized the firm’s assets correctly, to increase
the investor’s wealth. It ensures a fair return to its owners and secures
optimum utilization of firms assets
It helps in inter-firm comparison:
Ratio analysis helps in inter-firm comparison by providing necessary data.
An interfirm comparison indicates relative position.It provides the relevant
data for the comparison of the performance of different departments. If
comparison shows a variance, the possible reasons of variations may be
identified and if results are negative, the action may be intiated immediately
to bring them in line.
It simplifies financial statement:
The information given in the basic financial statements serves no useful
Purpose unless it s interrupted and analyzed in some comparable terms. The
ratio analysis is one of the tools in the hands of those who want to know
something more from the financial statements in the simplified manner.
It helps in determining the financial position of the concern:
, Ratio analysis facilitates the management to know whether the firms
financial position is improving or deteriorating or is constant over the years
by setting a trend with the help of ratios The analysis with the help of ratio
analysis can know the direction of the trend of strategic ratio may help the
management in the task of planning, forecasting and controlling.
It is helpful in budgeting and forecasting:
Accounting ratios provide a reliable data, which can be compared, studied
And analyzed.These ratios provide sound footing for future prospectus. The
ratios can also serve as a basis for preparing budgeting future line of action.
Liquidity position:
With help of ratio analysis conclusions can be drawn regarding the
Liquidity position of a firm. The liquidity positon of a firm would be
satisfactory if it is able to meet its current obligation when they
become due. The ability to met short term liabilities is reflected in the
liquidity ratio of a firm.
Long term solvency:
Ratio analysis is equally for assessing the long term financial ability
of the Firm. The long term solvency s measured by the leverage or
capital structure and profitability ratio which shows the earning power
and operating efficiency, Solvency ratio shows relationship between
total liability and total assets.
Operating efficieny:
Yet another dimension of usefulness or ratio analysis, relevant
from the View point of management is that it throws light on the
degree efficiency in the various activity ratios measures this kind of
operational efficiency.
