Question

Why is ratio analysis so important when analyzing a company's financial? Please discuss in 150 words or more.

Thank you

Answer 1

ratio analysis is a financial analysis tool that performs some operations on the numbers given in the financial statement and tries to analyze the health of the organization. A ratio is a mathematical expression that relates one number to other. Ratio analysis uses all three basic financial statements and analyses liquidity, profitability, solvency and efficiency of the company. Further financial ratios help in analyzing strengths and weaknesses of the company and suggest actions to improve the financials. Financial ratios also provide a base to compare the performance with peers and industry benchmark and helps in understanding whether they are improving as compared to the industry or not. based on past financial data and calculated ratios, companies can formulate strategic plans that suit their condition and improve decision making. Financial ratios help in the deeper analysis of available data and therefore, suggests remedial measures to overcome the hindrances. Investors and creditors use financial ratios quite frequently before investing and lending their money to the company.