Definition of Ratio Analysis

Ratio analysis is a fundamental means of examining the health of a company by studying the
relationships of key financial variables. Many analysts believe ratio analysis is the most
important aspect of the analysis process. A firm's ratios are normally compared to the ratios of
other companies in that firm's industry or tracked over time internally in order to see trends. For
example, the debt ratio compares a company's total debt to its total assets. If a firm's debt ratio is
low relative to its competitors' ratios or has decreased since last year, the firm is less dependent
on debt and is therefore perhaps a less risky investment. To evaluate companies, analysts use
many ratios, including measures of liquidity, profitability, debt, operating performance, cash
flow, and valuation.
Meaning and definition of Ratio Analysis
Ratio analysis is a tool brought into play by individuals to carry out an evaluative analysis of
information in the financial statements of a company. These ratios are calculated from current
year figures and then compared to past years, other companies, the industry, and also the
company to assess the performance of the company. Besides, ratio analysis is used
predominantly by proponents of financial analysis.
As stated by Investopedia, there are numerous ratios that can be estimated from the financial
statements pertaining to a business companys activity, performance, liquidity, and financing .
Some of the most common ratios include the debt-equity ratio, price-earnings ratio, asset
turnover, earnings per share, and working capital.

DEFINITION of 'Ratio Analysis'

Quantitative analysis of information contained in a companys financial statements. Ratio
analysis is based on line items in financial statements like the balance sheet, income statement
and cash flow statement; the ratios of one item or a combination of items - to another item or
combination are then calculated. Ratio analysis is used to evaluate various aspects of a
companys operating and financial performance such as its efficiency, liquidity, profitability and
solvency. The trend of these ratios over time is studied to check whether they are improving or
deteriorating. Ratios are also compared across different companies in the same sector to see how
they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of
fundamental analysis.

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Ratio Analysis
Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas. The ratios are categorized as
Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability
Ratios, and Market Value Ratios.
Ratio Analysis as a tool possesses several important features. The data, which are provided by
financial statements, are readily available. The computation of ratios facilitates the comparison
of firms which differ in size. Ratios can be used to compare a firm's financial performance with
industry averages. In addition, ratios can be used in a form of trend analysis to identify areas
where performance has improved or deteriorated over time.
Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the
distortions which arise in financial statements due to such things as Historical Cost Accounting
and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis,
to obtain a quick indication of a firm's performance and to identify areas which need to be
investigated further.
The pages below present the most widely used ratios in each of the categories given above.
Please keep in mind that there is not universal agreement as to how many of these ratios should
be calculated. You may find that different books use slightly different formulas for the
computation of many ratios. Therefore, if you are comparing a ratio that you calculated with a
published ratio or an industry average, make sure that you use the same formula as used in the
calculation of the published ratio.

Definition of Ratio Analysis

Ratio analysis is a fundamental means of examining the health of a company by studying the
relationships of key financial variables. Many analysts believe ratio analysis is the most
important aspect of the analysis process. A firm's ratios are normally compared to the ratios of
other companies in that firm's industry or tracked over time internally in order to see trends. For
example, the debt ratio compares a company's total debt to its total assets. If a firm's debt ratio is
low relative to its competitors' ratios or has decreased since last year, the firm is less dependent
on debt and is therefore perhaps a less risky investment. To evaluate companies, analysts use
many ratios, including measures of liquidity, profitability, debt, operating performance, cash
flow, and valuation.