What is meant by Ratio Analysis? Explain the importance of ration analysis.
Meaning of Ratio Analysis:
Ratio analysis is a technique of analysis of financial statements. An analysis of financial statements with the help of ratio may be termed as ‘ratio analysis’. It implies the process of computing, determining and presenting the relationship of items or group of items of financial. statements.
Ratio Analysis is the process of identifying the financial strengths and weaknesses of the enterprise by logically establishing relationship between the items of Income Statement or Balance Sheet or both and interpreting the results thereof for getting meaningful conclusions.
Importance or Advantages of Ratio Analysis :
- Ratio analysis reflects the working efficiency of a concern.
- Ratio analysis facilitates comparison between one firm and another in the same industry over a number of years to ascertain profitability.
- Ratio analysis is helpful in forecasting likely event in future.
- Since ratio analysis reflect the financial health of a concern, bank, insurance and other financial institutions rely on them while judging loan application and in taking vital investment decisions. In other words, ratio analysis is useful in judging the solvency of the business.
- Ratio analysis helps in establishing trend, since the result are analyzed over a number of years. Trend analysis is fruitful in preparing plans for future.