Importance of Ratio Analysis
Ratio analysis is critical for analyzing a company’s financial condition, liquidity, profitability, risk, efficiency, operational effectiveness, and wise use of cash. It also illustrates the tendency or comparison of economic conditions, which is useful for corporate shareholders’ investment decisions. Different types of accounting ratios provide different information and serve different purposes.
- Liquidity Ratios: These ratios tell about a company’s capacity to pay off short-term debt.
- Leverage Ratios: These are responsible to examine the company’s debt level in relation to its capital structure.
- Efficiency Ratios: These show a company’s efficiency in the utilization of its resources.
- Profitability Ratios: The company’s ability to create profits from revenue is known by these ratios.
- Market Value Ratios: Analysis of the company’s stock price is done with the help of these ratios.
Ratio Analysis- Importance, Advantages and Limitations
A financial ratio, also known as an accounting ratio, is the size of two numerical values obtained from an organisation’s financial accounts. There are several standard ratios used in accounting to try to analyze the overall financial state of a firm or other entity. Accounting ratios, also known as financial ratios, are used to calculate a company’s performance and profitability based on its financial records. They provide a means of expressing the relationship between one accounting data item along with another and are the origin of ratio analysis. To put it another way, an accounting ratio denotes a quantitative agreement that is used for making decisions and analyses. It serves as the foundation for both intra and inter-firm comparisons.
What are Accounting Ratios?
Accounting ratios are the quantifiable or numerical connection between two accounting data used to assess a company’s performance. Ratios are used to compare many aspects of a company, such as revenue, liquidity, solvency, and efficiency, and can be stated as a percentage, fraction, or decimal. Accounting ratios are those that are determined using financial data documented in a company’s financial statements.
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