Explain Ratio Analysis and its advantages.

Explain Ratio Analysis and its advantages.

Ratio analysis is a systematic technique of analysis and interpretation of financial statements i.e Profitability statement and Balance sheet with the help of various ratios so that the strengths and weakness and the financial position of the firm can be determined. This technique is not a creative technique as the information already given in the financial statements is used.

- It helps to appraise the firms in term of their profitability and efficiency of performance.

- Proper comparison of the ratios helps us to reveal the final position and condition of the firm or business in comparison with other firms in the same industry.

- They are one of the best instruments available to the management to impart the basic functions like planning, forecasting, coordination, communication and control.

- They act as an index of the efficiency of enterprise. It diagnoses the financial health of an enterprise.

- They provide data for inter firm comparison or intra firm comparison.

- Investment decisions are sometimes based on the conditions reveled by certain ratios.

- With the help of one ratio the other ratio can be easily estimated.
What are the limitations of Ratio Analysis?
The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparisons…
What precautions should be taken before using Ratio Analysis as a technique for interpretation of financial statements?
Reliability of the financial statements should be checked first as the ratio analysis is based on financial statements….
What are the different groups under which ratios are classified?
The ratios can be classified under following different groups:…
Post your comment