2. Ratio analysis is a quantitative analysis of data
enclosed in an enterprise’s financial statements. It is
used to assess multiple perspectives of an enterprise’s
working and financial performance such as its liquidity,
performance, solvency and profitability. To put it in
other words, Ratio analysis is the method of analysing
and comparing financial data by computing meaningful
financial statement value percentages rather than
comparing line items from each financial statement.
What is Ratio Analysis?
3. ADVANTAGES OF RATIO ANALYSIS?
Financial statements are simplified.
It helps in comparing enterprises of various size with
each other.
It assists in trend analysis which incorporates
comparing a single enterprise over a period.
It highlights significant data in a plain form
immediately. A user can decide an enterprise by just
looking at few numbers rather than understanding the
complete financial statements.
4. DISADVANTAGES OF RATIO ANALYSIS
Financial statements seem to be complicated.
Several organization work in various enterprises each
possessing different environmental positions such as market
structure, regulation, etc., Such factors are important that a
comparison of 2 organization from varied industries might be
ambiguous.
Financial accounting data is influenced by views and
hypotheses. Accounting criteria provide different accounting
methods, which reduces comparability and thus ratio analysis is
less helpful in such circumstances.
Ratio analysis illustrates the associations between prior data
while users are more concerned about current and future data.
5. Objectives of Ratio Analysis
Measure of Profitability
Evaluation of Operational Efficiency
Ensure Suitable Liquidity
Overall Financial Strength
Comparison
6. LIMITATIONS OF RATIO ANALYSIS
The technique of ratio analysis is a very
useful device for making a study of the financial
health of a firm. But it has some limitations
which must not be lost sight of before
undertaking such analysis.
