Ratio Analysis - Meaning and Types

Ratio Analysis - Meaning and Types

• 2.
  Ratio analysis isa 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 RATIOANALYSIS? 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 RATIOANALYSIS 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 RatioAnalysis Measure of Profitability Evaluation of Operational Efficiency Ensure Suitable Liquidity Overall Financial Strength Comparison
• 6.
  LIMITATIONS OF RATIOANALYSIS 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.