Ratio Analysis

● The Financial statements prepared by a company reveals a lot of relevant

information to its various stakeholders.

● However, ratio analysis further extends the concept by developing relation between
assets, liabilities and shareholder’s funds.

● It helps to serve a definite purpose to various stakeholders of the company by

providing a standard relationship.

● However the standard criteria changes from sector to another sector. It helps a
company to analyze financial statements in a more effective and efficient manner
improving their overall efficiency.

● The ratios are classified into Liquidity, Profitability, Efficiency and Solvency ratio.

Advantages
1. It helps to determine the profitability of a firm.
2. It helps to determine how effectively a company manages its inventory.
3. It helps to forecast the future and past trends of a company.
4. It helps to determine how well management of a company manages its
assets.
5. Ratio analysis helps investors to analyze whether a company is profitable
or not.

Disadvantages
1. The environment and product of every sector is different that makes it
difficult to interpret as per standard ratios
2. Ratio analysis does not serve the purpose to predict accurate future
trends.
3. Ratio analysis establishes a relationship between any two variables that
might have different interpretations for individuals.
4. The ratio analysis interprets value of assets and liabilities as per financial
statements and fails to interpret the potential of management.