Ratio Analysis in Financial Management
Ratio Analysis is a quantitative technique used to assess a company’s financial performance by analyzing data from its financial statements. Ratios help in comparing companies, identifying trends, and making informed financial decisions.
- Assesses financial health and stability of a business
- Helps stakeholders make informed decisions
- Assists in performance comparisons over time or with peers
Types of Ratios
1. Liquidity Ratios
These measure a company's ability to meet short-term obligations.
2. Solvency (Leverage) Ratios
These indicate a firm’s ability to meet long-term obligations.
3. Profitability Ratios
These assess the company’s ability to generate profit relative to revenue, assets, or equity.
4. Efficiency (Activity) Ratios
These measure how effectively a company uses its assets.
Conclusion
Ratio analysis provides crucial insights into financial performance and helps stakeholders evaluate the profitability, efficiency, solvency, and liquidity of a business. When used consistently and alongside other tools, it becomes a powerful decision-making aid.