Notes On Ratio Analysis:

       Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in certain decisions. It involves four steps:

  1. Selection of relevant data from financial statements depending upon the objectives of the analysis.
  2. Calculation of appropriate ratios forms the above data.
  3. Comparison of the calculated ratio with ratios of the same firm in the past or the ratios developed form projected financial statements.
  4. Interpretation of ratios.
Uses and Significance of Ratio Analysis:

       Ratio Analysis s one of the most powerful tool of financial analysis. It is used as a device to analyze and interpret the financial health of the enterprise. Like a physician, financial analyst analyses the financial statement with various tools of analyses before commenting upon the financial health and weakness of an enterprise. It is with the help of ratios that the financial statements can be analyzed more clearly and decisions are made from such analysis.

       The usage of ratios is not confined with financial managers only. The suppliers of goods on credit, banks, financial institutions, shareholders etc also makes use of the ratio analysis as a tool for evaluation of the financial position and performance of a firm for granting credit, providing loans or making investments in the firm.

Other Importance and Managerial Uses of Ratio Analysis:
  1. Ratio Analysis helps to take financial decisions from the financial statements that are prepared with the help of ratio analysis.
  2. Ratio Analysis helps to make financial forecasting and planning. The ratios of the past years work as a guide for the future.
  3. Ratio Analysis helps to read and make out the financial strength and weaknesses of the firm. The informations of the financial statements prepared with the help ratio analysis convey a meaningful message for the financial analyst.
  4. Ratio Analysis also helps in coordination which is outmost importance in the effective business management. Better communication of the weakness and efficiency of the firm results in better coordination of the enterprise.
  5. Ratio analysis helps in making effective control of the business. Standard ratios can be based on proforma financial statements and variations of deviations if any can be found by comparing the actuals with the pre-defined standards so as to take a corrective action at the right time.