1.1 Meaning of Ratio Analysis
Ratio analysis has been view as a primary technique of the analysis of financial statement from various aspects of business. (Brigham & Houston, 2004 p. 95)state” Ratio Analysis involves comparisons. A company’s ratios are compared with those of other firms in the same industry, that is, to industry average figures.” Ratio refers to the relationship expressed in mathematical term among a set of numeral and two individual links with each other in logical way. It is based on the assumptions that single figure may not tell us any useful information but when expressed relative to another figure, it will definitely give us some meaningful information. Since ratio is a mathematical relationship between two or above accounting figures, it can be expressed in as a pure ratio, as a rate of times or as a percentage. The relationship between two and above accounting figures or group is called financial ratio. Financial ratios may be calculated in different ways, using different figures (Gibson and Cassar, 2005). Financial Ratio helps to outline a large volume of financial data into a concise form so it is easy to interpret and conclude the performance and position of the firm. 1.2 Ratio Analysis
There are two steps that ratio analysis needs to be follow. First, the calculation of ratio has to be done. Second, the ratio has to compare with predetermined standards. Predetermined standards can be the average ratio of industry or the same firm past ratio. When interpreting specific firm, the calculated ratio has to compare with the predetermined standard otherwise the analyst cannot attain any effective conclusion. There are cross section analysis, time series analysis and combined analysis three types of different way in comparison the ratio. In cross section analysis, it helps the analyst find out how the particular firm has performed associated with the firm’s competitor by using the ratio of the firm to compare with the ratio of other...
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