Question
In: Finance
Why do we use ratio analysis?
Why do we use ratio analysis?
Solutions
Expert Solution
Answer:
Ratio Analysis is the analysis of information contained in the
Company’s financial statement. It is also used to evaluate the
Company’s operating and financial performance i.e. efficiency,
profitability, solvency and liquidity. The investors refer the
ratio analysis for investing in the Company. It involves evaluating
the performance and financial health of the Company by analysis the
data mention in the financial statement of the Company. It gives a
warning to Company about potential improvement or deterioration in
a Company’s financial situation or performance. The data get from
the ratio analysis is used to compare the Company’s performance
over time to assess whether the company is improving or diminishing
its value. The six main groups of ratio analysis are:
1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Efficiency Ratios
5. Coverage Ratios
6. Market Prospect Ratios
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