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Ratio Analysis

Ratio analysis is a management tool that involves calculating financial ratios from a company's balance sheet and income statement to analyze its financial performance over time and compare it to other companies. There are several types of financial ratios, including profitability ratios that examine profit in relation to sales revenue, liquidity ratios that assess a firm's ability to pay short-term liabilities, and gearing ratios that creditors and investors use to evaluate a company's long-term risk in meeting its debt obligations.

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126 views1 page

Ratio Analysis

Ratio analysis is a management tool that involves calculating financial ratios from a company's balance sheet and income statement to analyze its financial performance over time and compare it to other companies. There are several types of financial ratios, including profitability ratios that examine profit in relation to sales revenue, liquidity ratios that assess a firm's ability to pay short-term liabilities, and gearing ratios that creditors and investors use to evaluate a company's long-term risk in meeting its debt obligations.

Uploaded by

MayankJha
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We take content rights seriously. If you suspect this is your content, claim it here.
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Ratio Analysis

Ratio analysis is a management tool for analyzing and judging the financial
performance of a business. This is done by calculating financial ratios from a firm's
final accounts (namely the balance sheet and profit and loss account).

In order to assess financial performance over time, figures are usually compared
with previous year's figures. To judge the financial performance of a company
relative to other comparable companies, financial date can be gathered from the
balance sheets and income statements of different companies and ratio analyses
can be performed on each company and compared.

Types of financial ratios:

1. Profitability ratios - examine profit in relation to other figures (e.g. sales


revenue). Profitability ratios help to assess the financial performance of a
business. Managers, employees and potential creditors will be interested in
these ratios as they show how well a firm has performed in financial terms.
2. Liquidity ratios - look at the ability of the firm to pay its short-term
liabilities, such as comparing working capital to current liabilities. Creditors
and financial lenders will be interested in these ratios to help them assess the
likelihood of being paid or repaid.
3. Efficiency ratios - show how well a firm is using its resources (e.g., how
long does it take a firm to sell its stocks or collect money from its debtors.
4. Shareholders ratios - measure the returns to shareholders of a company.
Current and potential shareholders will be interested in dividends and
earnings per share.
5. Gearing ratio - this looks at the long-term liquidity position of a firm.
Creditors and investors will be interested in this ratio, as a high degree of
gearing could mean that a firm is risky, in that it may have difficulty meeting
its debt repayment obligations, especially if interest rates rise.

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