- Ratio Analysis is a powerful tool among the various tools of financial statement analysis.
- It simplifies a company in establishing its financial health i.e., its financial performance whether it is gaining profits or suffering losses.
Different Kinds of Ratio Analysis
- Liquidity Ratio facilitates to identify whether the company has enough capability to meet short term requirements. Current and Quick Ratios expose the assessment between Current Assets and Current Liabilities suggest for required decision making.
- The Profitability Ratios like Gross Profit Ratio, Net Profit Ratio and Operating Ratio give a picture of profitability position of the concern.
- Long term solvency and the leverage ratios such as Debt-Equity Ratio and Interest Coverage Ratio convey a firm’s ability to meet the interest cost refunds schedules of its long-term responsibilities and show the proportions of debt and equity in financing of the firms.
- Activity Ratios such as Inventory Turn Over Ratio, Debtor Turnover Ratio, Working Capital Turnover Ratio measure the efficiency with which the resources of a firm have been hired.
