Question

Why are trend analysis and industry comparison important to financial ratio analysis?

Answer 1

Answer:-

Meaning and importance of financial ratio analysis:-

Financial ratio analysis depicts relationship between two line items in the financial statements.Financial ratios are used by management to understand financial statements in a better way and take decisions.Ratios trigger Strenghts and weakness based on which strategies can be developed.Ratios are important to understand the liquidity position, profitability,solvency and profitability of the company.

Meaning and importance of trend analysis:-

Trend analysis is comparision of past and current financials and finacial ratios to make business decisions based on trends.It gives owners an idea of how the future trend will be i.e,what has happened in the past will affect the future.It is used for budgeting,forecasting and setting up long term strategies.It helps to identify the areas that needs improvement and the areas that are performing well.It depicts strengths and weakness of an organization.

Meaning and importance of industry comparision:-

Industry comparision means comparing performance of a company with that of the industry as a whole.It is useful to understand the market conditions basis which strategies can be developed.It is useful for identifying the opportunities and threats in a particular industry and take necessary business decisions.

Trend analysis uses financial ratios of different periods and compares to make necessary business decisions.It depicts how well the company has performed over the years using ratios as a base.Comparison of financial ratios of a company with that of the industry helps to identify where the company stands in the market.It helps to identify the areas of improvement and helps in decision making.