What Are The Objectives Of Ratio Analysis?


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Sarah Marsh Profile
Sarah Marsh answered
The main objective of ratio analysis is to show a firm’s relative strengths and weaknesses. Other objectives of ratio analysis include comparisons for a useful interpretation of financial statements, finding solutions to unfavorable financial statements and to help take corrective measures when, in comparison to other similar firms, financial conditions and performance of the firm are unfavorable. Ratio analysis also determines the financial condition and financial performance of a firm. Using ratio analysis allows an analyst to determine the ability of the firm to meet its obligations, the overall operating efficiency and performance of the firm and the efficiency with which the firm is utilizing its assets in generating sales.

Ratio analysis is a tool used to conduct a quantitative analysis of information in a company’s financial statements. Ratios are calculated by individuals from current year numbers and are these numbers are then used to judge the performance of the company by comparing them to previous years, other companies, the industry or even the economy. A ratio analysis can help give a quick indication of how a company is doing in certain key areas and the ratios can be categorised as short-term solvency ratios, debt management ratios, asset management ratios, profitability ratios, and market value ratios.

Ratio analysis should only be used as a first step in financial analysis. As it is a tool that is based on accounting information, it ca be limited by any distortions that arise in financial statements due to historical cost accounting and inflation. It can also be difficult to draw comparisons using ratio analysis due to differences in the analysis made by other firms. Using ratio analysis can identify areas that may need to be investigating further. Some of the advantages of ratio analysis include that is helps in credit analysis, it can help in financial performance analysis and that it simplifies a financial statement.
amber Jhon Profile
amber Jhon answered
Ratio analysis is done by taking the information from the financial statements of a company. Ration analysis is the most important component of the analysis of a company. It can give a simple and clear understanding to the various financial aspects of the company like turnover ratio can give an idea about the sales made by the company. Ratio analysis also give an appropriate way to compare different companies in the same industry and also to compare the current result of the company from the historical results. Moreover, ratio analysis give an organized picture of what is happening in the company like gross profit ratio and income profit ratio highlight various aspects of profitability of the company.

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