Ratio Analysis: Financial Ratios

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Financial Ratio
A financial ratio or accounting ratio is a relative magnitude of two chose numerical values taken from an enterprise 's financial statements. Regularly utilized as a part of accounting, there are many standard ratios used to attempt to assess the general money related state of an enterprise or other association. Money related proportions might be used by chiefs inside a firm, by present and potential investors (ratios) of a firm, and by a company 's loan bosses.Financial analysts use financial ratios to think about the qualities and shortcomings in different companies.[1] If shares in an organization are exchanged a financial market, the market price of the offers is utilized as a part of certain financial ratios.

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They contain various facts and figures and it is for the reader to conclude, whether these facts indicate a good or bad managerial performance. Ratio analysis is the most important tool of analysing these financial statements. It helps the reader in giving tongue to the mute heaps of figures given in financial statements. The figures then speak of liquidity, solvency, profitability etc. of the business enterprise. Some important objects and advantages derived by a firm by the use of accounting ratios…show more content…
Effective Control:- Ratio analysis discloses the liquidity, solvency and profitability of the business enterprise. Such information enables management to assess the changes that have taken place over a period of time in the financial activities of the business. It helps them in discharging their managerial functions e.g., planning, organizing, directing, communicating and controlling more effectively.

Limitations of Ratio Analysis
Ratio analysis is a very important tool of financial analysis. But despite it’s being indispensable, the ratio analysis suffers from a number of limitations. These limitations should be kept in mind while making use of the ratio analysis:-

False accounting data gives false ratios:- Accounting ratios are calculated on the basis of given data given in profit and loss account and balance sheet. Therefore, they will be only as correct as the accounting data on which they are based. For example, if the closing stock is over-valued, not only the profitability will be overstated but also the financial position will appear to be better. Therefore, unless the profit and loss account and balance sheet are reliable, the ratios based on them will not be reliable. There are certain limitations of financial statements as such, the ratios calculated on the basis of such financial statements will also have the same

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