Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. According to Myers , “Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements."
Advantages and Uses of Ratio Analysis
There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to work out a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner:
To work out the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way profitability ratios show the actual performance of the business. There is no big increase in profitability ratios of Ashok Leyland but returns are more than last year. In other side Cipla decrease in profitability ratios. In HDFC the profit margin and returns are good. No major change is HPCL profitability ratios. The Infosys is the I.T sector company has more profitability margin as compare to other 4 industry.
To work out the solvency: With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. In case external liabilities are more than that of the assets of the company, it shows the unsound position of the business. In this case the business has to make it possible to repay its loans. The standard ratio is 2:1. Ashok Leyland has not good not position in solvency ratio. Cipla has good assets to pay external...