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Importance of Ratio Analysis for financial analysis. Managementparadise.com is bring some of the tool for financial analysis and report. Understand the term of Ratio Analysis steps and process.
IMPORTANCE OF RATIO ANALYSIS
The ratio analysis is the most important tools of financial analysis. The various groups of people having different interest are interested in analyzing the financial information.
These groups use the analysis to determine particular financial characteristics of which they are interested. The importance of ratio analysis can be summarized for various groups of peoples vested with the diversified interests are as under:
1. For short term creditors – The short term creditors like bankers and suppliers of materials can determine the firm’s ability to meet its current obligation with the help of liquidity ratio and quick ratio.
2. For long term creditors – The long term creditors like debenture holders and financial institutions can determine the firm’s long term financial strength and survival with the help of leverage or capital structure ratio as debt equity ratio.
They can know :
a) What sources of long term are employed?
b) What is the relationship between various sources of finances?
c) Is there any risk to the solvency of the firm due to the employment of excessive long term debts?
3. For the management – The management can determine the operating
efficiency with the firm is utilizing its various in generating the sales revenues with the help of activity ratio such as capital turnover ratio, stock turnover ratio, etc…
4. For investors – The investor can determine the magnitude and direction of the movements in firm’s earning with the help of profitability ratio such as earning per share etc…
IMPORTANCE OF RATIO ANALYSIS
The ratio analysis is the most important tools of financial analysis. The various groups of people having different interest are interested in analyzing the financial information.
These groups use the analysis to determine particular financial characteristics of which they are interested. The importance of ratio analysis can be summarized for various groups of peoples vested with the diversified interests are as under:
1. For short term creditors – The short term creditors like bankers and suppliers of materials can determine the firm’s ability to meet its current obligation with the help of liquidity ratio and quick ratio.
2. For long term creditors – The long term creditors like debenture holders and financial institutions can determine the firm’s long term financial strength and survival with the help of leverage or capital structure ratio as debt equity ratio.
They can know :
a) What sources of long term are employed?
b) What is the relationship between various sources of finances?
c) Is there any risk to the solvency of the firm due to the employment of excessive long term debts?
3. For the management – The management can determine the operating
efficiency with the firm is utilizing its various in generating the sales revenues with the help of activity ratio such as capital turnover ratio, stock turnover ratio, etc…
4. For investors – The investor can determine the magnitude and direction of the movements in firm’s earning with the help of profitability ratio such as earning per share etc…
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