Management a/c’s

RATIO ANALYSIS
(INTRODUCTION)
The ratio analysis is one of the most powerful tools of financial analysis. It is
the process of establishing and interpreting various ratios. It is with the help of
ratios that the financial statements can be analysed more clearly and decisions
made from such analysis.

(DEFINITION)
A ratio is “an expression of the quantitative relationship between two
numbers”.
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(MEANING)
The company’s financial information is contained in Balance Sheet and Profit
and Loss Account. Absolute figures are useful but they do not convey much
meaning. In terms of accounting ratios, comparison of the related figures
makes them meaningful. It is difficult to say which business concern is more
efficient unless they are related to their respective figures of capital
investment or sales, here lies the importance of ratio analysis.
Analysis and interpretation of various accounting ratio gives a better
understanding of the financial condition and performance of a business
concern.

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 Management a/c’s

(NATURE)
Ratio analysis is a technique of analysis and interpretation of financial
statements. It is the process of establishing and interpreting various ratios for
helping in making certain decisions. However, ratio analysis is not an end in
itself. It is only a means of better understanding of financial strengths and
weaknesses of a firm.

Calculation of mere ratios does not serve any purpose, unless several
appropriate ratios are analysed and interpreted. There are a number of ratios
which can be calculated from the information given in the financial statements,
but the analyst has to select the appropriate data and calculate only a few
appropriate ratios from the same keeping in mind the objective of analysis. The
ratios may be used as a symptom like blood pressure, the pulse rate or the
body temperature and their interpretation depends upon the calibre and
competence of the analyst.

The following are the four steps involved in the ratio analysis:
(i) Selection of relevant data from the financial statements depending upon the
objective of the analysis.

(ii) Calculation of appropriate ratios from the above data.

(iii) Comparison of the calculated ratios with the ratios of the same firm in the
past, or the ratios developed from projected financial statements or the ratios
of some other firms or the comparison with ratios of the industry to which the
firm belongs.

(iv)Interpretation of the ratios.

PREPARED BY-----------------------------------D.D.S
 Management a/c’s

(SIGNIFICANCE)

Ratios are exceptionally useful tools with which one can judge financial
performance of the enterprise over a period of time. The efficiency of the
enterprise can also be judged against the industry average. In vertical analysis
ratios help the analyst to form a judgment whether performance of the firm at
a point of time is good, questionable or poor.

Likewise, use of ratios in horizontal analysis indicates whether the financial

condition of the firm is improving or deteriorating and whether the cost,
profitability or efficiency is showing an upward or downward trend. A study of
the trend of strategic ratios may help the management in the task of planning
and forecasting. At times, the investment decisions are based on the condition
revealed by certain ratios. In this way it serves as handmaid to the
management.

PREPARED BY-----------------------------------D.D.S
 Management a/c’s

UTILITIES/IMPORTANCE/

PREPARED BY-----------------------------------D.D.S