Ratio, speaking on a general note refers to numerical or quantitative relation between two comparable variables. Since, ratio is relation between two figures expressed in mathematical terms, hence it can be expressed both in terms of quotient and percentage proportions. While representing, it is termed in a fraction.

Understanding significance of Ratio Analysis:

As a type of Financial Statement Analysis, a Ratio Analysis presents a quick detail regarding a firm’s financial performance during a certain time period, in certain key domains. It can be divided into: Debt Management Ratios, Profitability Ratios, Market Value Ratios, Short Term Solvency Ratios and Asset Management Ratios.

  • It helps management in decision making and implementation and control of certain business tools.
  • It depicts financial health of a company.
  • It is also used by those parties who are interested in knowing of the different aspects of a company prior to investments.

Based on accounting data of financial statements, various classifications can be made for using this form of ratio analysis.

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