Why Ratio Analysis is Important
Mainly there are three groups of people who are interested in the Ratio analysis of Financial Statement.
- Owners or investors,
- Creditors and
- Financial executives.
The importance of analysis changes for the purpose for which it is calculated. According to the purpose they serve, the importance of these ratio changes as per the use of the above-mentioned groups. The main concern for the investors is with the earning capacity of the investor. Creditors want to know if the firm is meeting its financial obligation timely and Financial executives are interested in any tool that will help them in making an intelligent decision regarding the cost, efficiency, profitability, and liquidity. Following points will help you to know the importance of Financial Ratio analysis. The ratios analysis is a remarkable tool that helps the firm to know its financial performance over a period of time. With the help of ratios, you can come up with a conclusion regarding different aspects of financial position, which may be a company’s operation or its profitability. Analysis of different ratio helps you to know the position where your company stands. Analysis of ratios also helps you to know the liquidity state or the strength and weaknesses of your company.
Ratio Analysis used for Industry Comparison
With the help of ratio analysis, you can compare your performance with the best in the industry. You can also compare your performance with the industry’s average. This helps the company to know who it is performed as a company in comparison with the competitors. You can come up with a possible reason, corrective action, and strategies when there is a difference in the performance as compared with the best of industry.
Ratio Analysis used for Trend Analysis
The time factor is also considered important in ratio analysis. It means that you can see that if your company’s performance is improving or failing or is constant over a period of time. For this purpose trend analysis is performed. You can know, with the help of ratio analysis, that the direction the company’s performance is heading to be favorable or not. This analysis can help you in the planning, controlling and forecasting. Thus, ratio analysis plays a very important role in the interpretation of the financial statements correctly and to make the figures comparable and more meaningful. Simple Ratio Analysis Tool is available here to free download; https://allfinanceterms.com/ratio-analysis-tool/ Ratio Analysis with Accounting and Bookkeeping Tool is available here for Free Download. https://allfinanceterms.com/bookkeeping-and-financial-tool/