INTRODUCTION TO RATIO ANALYSIS
Ratio analysis is referred to as the study or analysis of the line
items present in the financial statements of the company. It can
be used to check various factors of a business such as
profitability, liquidity, solvency and efficiency of the company or
the business.
Ratio analysis is mainly performed by external analysts as
financial statements are the primary source of information for
external analysts.
The analysts very much rely on the current and past financial
statements in order to obtain important data for analyzing
financial performance of the company. The data or information
thus obtained during the analysis is helpful in determining
whether the financial position of a company is improving or
deteriorating.
Meaning and Definition of Ratio Analysis
Ratio analysis is a conceptual technique which dates back to the inception
of accounting, as a concept. Financial analysis as a scientific tool is used
to carry out the calculations in the area of accounting. In order to appraise
the valid and existent worth of an enterprise, the financial tool come handy,
regularly. Besides, it also allows the firms to observe the performance
spanning across a long period of time along with the impediments and
shortcomings. Financial analysis is an essential the mechanism for a clear
interpretation of financial statements. It aids the process of discovering,
the existence of any cross-sectional and time series linkages between
various ratios.
Formerly, Security qualified as a major requisite for banks and financial
institutions, to consider and grant loans and advances. However, there’s
been a complete paradigm shift in the structure.
Currently, lending is based on the evaluation of the actual need of the firms.
Financial viability of the proposal, as a base to grant loans, is now been
given precedence over security. Further, an element of risk is imperative in
every business decision. Credits, run a higher risk, as a part of any decision
making in business and so, Ratio analysis and other quantitative
techniques mitigate the risk to some the extent by providing a fair and
rational assessment of risks.
Ratio analysis broadly explains the process of computing, acts as a vital
tool in determination and presentation of the relationship of related items
and groups of items of the financial statements. The financial position of a
unit is concretely and clearly encapsulated by the means of ratio analysis.
, The significance of Ratio Analysis for a holistic Financial Analysis remains
unflinchingly supreme.
Advantages of Ratio Analysis
In order to establish the relationship between two accounting figures,
application of Ratio Analysis is necessary. Application of the same
provides significant information to the management or users who can
analyze the business situation? It also facilitates meaningful and
productive monitoring of the annual performance of the firm.
Illustrated below are the advantages of ratio analysis:
• It facilitates the accounting information to be summarized and simplified in
a concise and concrete form which is comprehensible to the user.
• It depicts the inter-relationship between the facts and figures of various
segments of business which are instrumental in taking important financial
decisions.
• Ratio analysis clears all the impediments and inefficiencies related to
• It equips the management with the requisite information enables
them to take prompt business -decisions.
• It helps the management in effectively discharging its
functions/operations such as planning, organizing, controlling,
directing and forecasting.
• Ratio analysis provides a detailed account of profitable and
unprofitable activities. Thus, the management is able to concentrate
on unprofitable activities and consider the necessary steps to
overcome the existential shortcomings.
• Ratio analysis is used as a benchmark for effective control of
performance of business activities.
• Ratios are an effectual means of communication and informing
about financial soundness made by the business concern to the
proprietors, investors, creditors and other parties.
• Ratio analysis is an effective tool which is used for measuring the
operating results of the enterprises.
• It facilitates control over the operation as well as resources of the
business.
• Ratio analysis provides all assistance to the management to
discharge responsibilities.
• Ratio analysis aids in accurate determination of the performance of
liquidity, profitability and solvency position of the business concern.
Limitations of Ratio Analysis
• Various environmental conditions such as regulation, market
Ratio analysis is referred to as the study or analysis of the line
items present in the financial statements of the company. It can
be used to check various factors of a business such as
profitability, liquidity, solvency and efficiency of the company or
the business.
Ratio analysis is mainly performed by external analysts as
financial statements are the primary source of information for
external analysts.
The analysts very much rely on the current and past financial
statements in order to obtain important data for analyzing
financial performance of the company. The data or information
thus obtained during the analysis is helpful in determining
whether the financial position of a company is improving or
deteriorating.
Meaning and Definition of Ratio Analysis
Ratio analysis is a conceptual technique which dates back to the inception
of accounting, as a concept. Financial analysis as a scientific tool is used
to carry out the calculations in the area of accounting. In order to appraise
the valid and existent worth of an enterprise, the financial tool come handy,
regularly. Besides, it also allows the firms to observe the performance
spanning across a long period of time along with the impediments and
shortcomings. Financial analysis is an essential the mechanism for a clear
interpretation of financial statements. It aids the process of discovering,
the existence of any cross-sectional and time series linkages between
various ratios.
Formerly, Security qualified as a major requisite for banks and financial
institutions, to consider and grant loans and advances. However, there’s
been a complete paradigm shift in the structure.
Currently, lending is based on the evaluation of the actual need of the firms.
Financial viability of the proposal, as a base to grant loans, is now been
given precedence over security. Further, an element of risk is imperative in
every business decision. Credits, run a higher risk, as a part of any decision
making in business and so, Ratio analysis and other quantitative
techniques mitigate the risk to some the extent by providing a fair and
rational assessment of risks.
Ratio analysis broadly explains the process of computing, acts as a vital
tool in determination and presentation of the relationship of related items
and groups of items of the financial statements. The financial position of a
unit is concretely and clearly encapsulated by the means of ratio analysis.
, The significance of Ratio Analysis for a holistic Financial Analysis remains
unflinchingly supreme.
Advantages of Ratio Analysis
In order to establish the relationship between two accounting figures,
application of Ratio Analysis is necessary. Application of the same
provides significant information to the management or users who can
analyze the business situation? It also facilitates meaningful and
productive monitoring of the annual performance of the firm.
Illustrated below are the advantages of ratio analysis:
• It facilitates the accounting information to be summarized and simplified in
a concise and concrete form which is comprehensible to the user.
• It depicts the inter-relationship between the facts and figures of various
segments of business which are instrumental in taking important financial
decisions.
• Ratio analysis clears all the impediments and inefficiencies related to
• It equips the management with the requisite information enables
them to take prompt business -decisions.
• It helps the management in effectively discharging its
functions/operations such as planning, organizing, controlling,
directing and forecasting.
• Ratio analysis provides a detailed account of profitable and
unprofitable activities. Thus, the management is able to concentrate
on unprofitable activities and consider the necessary steps to
overcome the existential shortcomings.
• Ratio analysis is used as a benchmark for effective control of
performance of business activities.
• Ratios are an effectual means of communication and informing
about financial soundness made by the business concern to the
proprietors, investors, creditors and other parties.
• Ratio analysis is an effective tool which is used for measuring the
operating results of the enterprises.
• It facilitates control over the operation as well as resources of the
business.
• Ratio analysis provides all assistance to the management to
discharge responsibilities.
• Ratio analysis aids in accurate determination of the performance of
liquidity, profitability and solvency position of the business concern.
Limitations of Ratio Analysis
• Various environmental conditions such as regulation, market
