Solvency ratio analysis takes into account the long-

term financial sustainability of a business. Therefore,

Solvency Ratio Analysis
it is used to analyse the ability of an organisation for
paying off its long-term financial obligations.

This category of ratio analysis helps a business

Ratio analysis is a quantitative method of gaining
insight into a company's liquidity, operational
efficiency, and profitability by studying its financial
statements such as them balance sheet and income
statement.
measure its profits As a result, accountants can use
Profitability Ratio Analysis
the profitability ratio analysis to determine the
company's ability to bag profits.
Features
This method duly analyses an organisation's liquidity
of its assets Therefore, individuals can gather an
Meaning Liquidity ratio Analysis
idea about the rate at which the companv can
convert is assets into cash
Activity ratio analysis Implies the assessment or a
Ratio analysis Activity Ratio Analysis
company efficiency and scale of operations. This
method helps accountants understand the pace at
which companies convert their inventones into sales.

Ratio analysis illustrates the associations

between prior data while users are more Disadvantages
concemed about current and future data

Advantages

Financial accounting data is influenced by views and

Subtopic
hypotheses. Accounting criteria provide different
accounting methods, which reduces comparability
and thus ratio analysis is less helpful in such
circumstances.
Helps in forecasting and planning by It helps in determining both liquidity and Helps in estimating budget for the firm by
performing trend analysis. long term solvency of the firm. analysing previous trends.

It helps in comparison of two or more Financial statements seem to be It provides significant information to users
Several organisations work in various enterprises firms. complicated. of accounting information regarding the
each possessing different environmental positions performance of the business.
such as market structure, regulation, etc., Such
factors are important that a comparison of 2
organisations from varied industries might be
ambiguous.