Meaning Of Ratio Analysis
Financial statement analysis the process of analyzing financial statements of a company so as to obtain meaningful information about its survival, stability, profitability, solvency and growth prospect. The financial statement analysis can be performed by using a number of techniques such as comparative statements, common size statements and ratio analysis. Ratio analysis is the most popularly and widely used technique of financial statement analysis.
In a simple word, ratio is a quotient of two numerical variables, which shows the relationship between the two figures. Accordingly, accounting ratio is a relationship between two numerical variables obtained from financial statements such as income statements and balance sheet. The income statement or profit and loss account shows the operating results in terms of net profit or loss of a company for a specific period. The balance sheet, on the other hand, shows the financial position of the company at the end of that period. Accounting ratios are used as an important tool of analyzing the financial performance of the company over the years and its comparative position among other companies in the industry.
Ratio analysis is the process of determining and interpreting numerical relationship between figures of financial statements. Since an absolute accounting figure often often does not provide much meaning by itself, it has to be analyze in relation to other figures so that significant information about the company's financial performance can be derived.
Ratio analysis is a process of determining and presenting the quantitative relationshipbetween two accounting figures to evaluate the strengths and weakness of a business. It is important from the point of view of investors, creditors and management for aanlysis and interpretation of a firm's financial health.
Presentation Of Ratio
Ratio can be expressed in the following terms:
1. Ratio method
Ratio method shows the relationship between two figures in ratio or proportion. It is expressed bysimple division of one item by another eg. 2.5:1,0.5:1 and so on.
2. Rate method
This method shows relationship in rate or times, like 2 times or 4 times and so on.
3. Percentage method
The relationship between two figures can be presented in percentage like 20%, 30% and so on.
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