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.