Ratio analysis compares line item data from a company’s financial statements.
. It describes the company’s financial health and mark how a company is performing over time, while comparing a company to another within the same industry or sector. Financial ratios are often divided up into seven main categories.
- Liquidity ratio
- Solvency ratio
- Efficiency ratio
- Profitability ratio
- Market prospect
- Investment leverage and
- Coverage ratio
Ratio analysis helps in analyzing of financial statements and understanding the profitability of the company, comparison of financial results will be helpful for decision making for investment by shareholders of the company. The organization operates under numerous risks related to industry, economy, and operations. Analysis of ratios helps to consider these risks and lets the management plan and take the appropriate steps. The financial leverage and operating leverages help in understanding the business risk of the firm.
The key application of ratio analysis is the comparability of each firms’ strengths and weaknesses. The ratios can also be compared to the previous ratio of the company and can help to measure the company’s development.
Financial ratios are the most common popular instruments used to assess the financial condition of a company. Ratios are easy to understand and easy to calculate. These can also be used to compare various companies in different industries.