The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a firm, as well as its historical performance and current financial condition. Track company performance. These are still widely used today as a way to describe the characteristics of a variable. Financial ratio analysis is a powerful tool of financial analysis that can give the business firm a complete picture of its financial performance on both a trend and an industry basis. The basic financial ratios compare costs and revenue for a particular period. Direct Material cost ratio of the firm is has less material cost during the period of 2004-05 &2007-08 … This analysis discloses the prevailing relationship among sales, cost and profit. Ratio analysis—the foundation of fundamental analysis—helps to gain a deeper insight into the financial health and the current and probable performance of the company being studied. Financial ratio analysis compares relationships between financial statement accounts to identify the strengths and weaknesses of a company. Since inventory is sold and restocked continuously, subtracting it from your assets results in a more precise visual than the current ratio. And again increase in next two year slithightlliy. The current assets turnover ratio is increasing during the period of 2004-06 and again it decrease in the period of 2006-07. 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. With a ratio comparing 12 to 16, for example, you see that both 12 and 16 can be divided by 4. In common usage, we would say the "P/E ratio is 30." In the 1940s, Stanley Smith Stevens introduced four scales of measurement: nominal, ordinal, interval, and ratio. For this insight, the analysts use the quantitative method where the information recorded in the company’s financial statements are compared and analyzed. Simplifying Ratios . Ratio Analysis: Meaning, Classification and Limitation of Ratio Analysis! Financial ratio analysis can be used in two different but equally useful ways. Nominal Ratio analysis highlights the liquidity, solvency, profitability and capital gearing. 11. Ratio analysis is not only useful to internal parties of business concern but also useful to external parties. The difference between the two is that in the quick ratio, inventory is subtracted from current assets. Meaning: Ratio analysis is the process of determining and interpreting numerical relationships based on financial statements. No matter how a ratio is written, it is important that it be simplified down to the smallest whole numbers possible, just as with any fraction. The cost is divided into two. Knowing the scale of measurement for a variable is an important aspect in choosing the right statistical analysis. Analysis of financial ratios serves two main purposes: 1. A ratio is a statistical yardstick that provides a measure of the relationship between two variables or figures. Cost Volume Profit Analysis. Financial ratios are usually split into seven main categories: liquidity, solvency, efficiency, profitability, equity, market prospects, investment leverage, and coverage. Ratios define the relationship between two variables. Meaning and definition of Ratio Analysis . 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. The debt ratio compares a business's debt to its assets as a whole. If the stock is selling for $60 per share, and the company's earnings are $2 per share, the ratio of price ($60) to earnings ($2) is 30 to 1. 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