describe in your own words what you learned providing an explanation of 200 words for Ratio...

describe in your own words what you learned providing an explanation of 200 words for Ratio Analysis ?

Expert Solution

Ratio analysis is probably one of the most important tools available to a financial analyst / manager. Ratio analysis is not just limited to academic curiosity but is widely used on a daily basis in the practical world of finance.
The basic premise of ratio analysis which makes is so very useful is that it is essentially based on the concept of relativity, i.e. it analyses a number in relation to another number, hence giving important meanings to those numbers and drawing useful conclusions as a result
Ratio analysis is very wide and helps in analyzing all financial aspects of a business (both in absolute terms as well as in comparison to the peers and industry) such as profitability, operational efficiency, valuation, leverage, liquidity, solvency, etc
E.g.: Company A and Company B, both FMCG businesses have enterprise values of $1 billion each but have an EBITDA of $50 million and $100 million respectively. In such a scenario, their EV/EBITDA multiples (A relative valuation ratio) come out to be 20 and 10 respectively, suggesting that the market is valuing earnings of Company A significantly higher than earnings of Company B
- Therefore EV/EBITDA ratio is used to compare the relative valuations of various players in an industry, helping in finding the most undervalued peers and a good investment opportunity
Ratio analysis is therefore a very useful tool for any financial analyst or a manager. It is used in wide spectrum of applications such as valuation, financial planning & management, Budgeting and forecasting, Accounting, Operations management, etc

jeff jeffy answered 4 days ago

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