Ratio Analysis Homework Help, Tutoring
Ratio Analysis Assignment Help, Ratio Analysis Tutor Help:
Ratio Analysis:
Ratio
The relationship between two numbers expressed mathematically is called a ratio.
Ratio Analysis
Ratio analysis is a systematic use of ratios to interpret and assess the performance
and status of a firm. It is a widely used tool of financial analysis. The use of
ratios as a tool of financial analysis involves their comparison as otherwise, a
single ratio, and an absolute figure fails to reveal the true position. Four types
of comparison are involved:
- Trend ratios
Trend ratios involve evaluation of financial performance over a period of time, say 5 years or 10 years, depending upon the requirement, using financial ratio analysis - Inter-firm Comparison
It involves comparison of different firm's financial ratios which are in the same industry, at a particular point of time - Comparison of items within a single year’s financial statement of a company and
- Comparison with standards fixed
Types of Ratios
Ratios can be classified into the following categories according to its function:
Ratios can be classified into the following categories according to its function:
- Liquidity Ratios
- Capital Structure ratios (Leverage Ratios)
- Profitability ratios
- Activity/Efficiency Ratios
- Integrated analysis of ratios and
- Growth Ratios
Advantages of Ratio Analysis:
- Enables measuring liquidity position in time for want of arrangement of funds
- Measures long-term solvency, reveals the strength and weaknesses of a firm
- Enables measuring operating efficiency
- Enables measuring overall profitability
- Enables inter-firm comparison
- Enables a firm to take the time dimension into account by trend analysis
Limitations of Ratio Analysis:
- Difficulty in comparison due to different procedures adopted by various firms
- Impact of inflation disregarded when using historical costs in financial statements
- Diversity in concepts used – there is difference of opinion regarding the various concepts used to compute the ratios
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