Importance Of Ratio Analysis
RATIO ANALYSIS
A ratio analysis is a company’s financial statements which contain information of quantitative analysis. Mostly it is based on financial statement such as, income statement, cash flow statement and balance sheet which the ratios of one item – or a combination of items - to another item or combination are then calculated. Ratio analysis is to calculated variety aspect of a business performance and operating such as its liquidity, efficiency, solvency and profitability. The studies of ratio analysis show whether the performance are improving or declining. This ratio analysis compared the performance between two businesses to evaluate comparative valuation. It is tell where a business might be headed by comparing the ratios against
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Such as help to analysis financial statement, judging efficiency, locating weakness, formulating plans and comparing performances.
Ratio analysis it is important in analysis financial statement. Mostly they use to make in decision by determine the financial situation of a business. However it is also help to identify the financial situation of business. By using the ratio analysis can identify the financial position of a business. It is help in taking a decision to management, investor, and financier. Ratio analysis also important in identify the efficiency in a judgment in term of management. It is help to judge how well the management has been utilizing their assets and recover profit.
Ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for lenders and investors. Using industry trends as a baseline, small-business owners can set time-bound performance goals in terms of specific ratios to give investors a glimpse into the potential of the new company. Ratios can also serve as an impetus for strategic change within an organization, providing management with relevant guidance and feedback as ratio valuations shift in response to organizational changes. Ratios keep managers on their toes by revealing financial weaknesses and
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Most of the companies will release their accounting ratio annually by network or printed paper. Government will collect all these information. Based on the information collected government will make or renew the policies. For example, every year the government will calculate the national income by collecting income data from all companies from different industries.
LIMITATION OF RATIO ANALYSIS
Although the ratio analysis helps a business firm in many factors it’s also has its own limitation. The companies should consider on the limitation in order to avoid any mistakes.
First of all, all the information that uses in derived ratio analysis is from actual past company performance result. This does not mean in future the result may same or carry forwarded. However, it still can be use as a standard document or reference and do make comparison in order to keep the consistency. Mostly the data in the income statement is stated in current costs, since some the aspect stated in past or historical value, which vary from current costs. It is may show unusual or different ratio
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