Question

Ratio analysis is used to make relative comparisons between organizations. Given that, why might an organization’s ratios on HIT spending differ from their peers? Might those differences be a good, bad, or indifferent thing?

Answer 1

Ratio analysis is comparison of different numbers from the balance sheet, income statement, and cash flow statement against the figures of previous years, other companies, the industry, or even the economy in general for the purpose of financial analysis.

Advantages of Ratio Analysis

• Ratio analysis will help the financing, investment and operating decisions of the firm.
• It simplifies complex accounting statements and financial data into simple ratios of operating efficiency, financial efficiency, long-term positions etc.
• Allows the company to conduct comparisons with other firms, industry standards, intra-firm comparisons etc. This will help the organization better understand its fiscal position in the economy.

Limitation of Ratio Analysis

• Ratio only calculated on historical data and it ignores inflation.
• Ratio Analysis ignores qualitative aspects of the firm.

So, in one line we can tell ratio analysis is good it will help for firm to compare the financial position of the firm and other industry standard