The importance of Ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects:
1. Liquidity Portion:
The liquidity portion of a firm would be satisfactory if it is able to meet it’s current obligations when they become due. A firm can be said to have the ability to meet it’s short maturing debt usually within a year as well as the principal. This ability is reflected in the liquidity ratios of a firm.
2. Long term Solvency
Ratio – analysis is equally useful for assessing the long term financial viability of a firm. The long term solvency is measured by the leverage or capital structure and profitability ratio which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weakness of a firm.
3. Operating efficiency
Ratio Analysis throws light on the degree of efficiency in the management and utilization of its assets. It would be recalled that the various activity ratios measures this kind of operational efficiency.
4. Over all profitability
The management is constantly concerned about the over all profitability of the enterprises they are concerned about the ability of the firm to meet its short term as well as long term obligation to its creditors to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm.
5. Inter firm comparison
an inter firm comparison would demonstrate the relative portion vis-à-vis it’s competitors. If the results are at variance either with the industry average or with those of the competitors the firm can seal to identify the probable reasons and in the light take remedical measures.
6. Trend Analysis
The financial portion of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fat that the analyst can know the direction of movement i.e., whether the movement is favorable or un-favorable for example : The ratio may be low as compared to the norm or standard, but the trend way be upward. On the other hand through the present level may be satisfactory but the trend may be declaring one thus trend analysis is the great significance.
1. Liquidity Portion:
The liquidity portion of a firm would be satisfactory if it is able to meet it’s current obligations when they become due. A firm can be said to have the ability to meet it’s short maturing debt usually within a year as well as the principal. This ability is reflected in the liquidity ratios of a firm.
2. Long term Solvency
Ratio – analysis is equally useful for assessing the long term financial viability of a firm. The long term solvency is measured by the leverage or capital structure and profitability ratio which focus on earning power and operating efficiency. Ratio analysis reveals the strength and weakness of a firm.
3. Operating efficiency
Ratio Analysis throws light on the degree of efficiency in the management and utilization of its assets. It would be recalled that the various activity ratios measures this kind of operational efficiency.
4. Over all profitability
The management is constantly concerned about the over all profitability of the enterprises they are concerned about the ability of the firm to meet its short term as well as long term obligation to its creditors to ensure a reasonable return to its owners and secure optimum utilization of the assets of the firm.
5. Inter firm comparison
an inter firm comparison would demonstrate the relative portion vis-à-vis it’s competitors. If the results are at variance either with the industry average or with those of the competitors the firm can seal to identify the probable reasons and in the light take remedical measures.
6. Trend Analysis
The financial portion of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of a trend analysis of ratios lies in the fat that the analyst can know the direction of movement i.e., whether the movement is favorable or un-favorable for example : The ratio may be low as compared to the norm or standard, but the trend way be upward. On the other hand through the present level may be satisfactory but the trend may be declaring one thus trend analysis is the great significance.