The traditional financial statements that comprise of the balance sheet and profit and loss account do not give enough information related to financial operations of the company. These financial statements prepared as per the statutory requirement of law need to be analyzed in order to evaluate the past performance of the company and the future prospects. The most widely used tool is Ratio Analysis.
DEFINITION OF RATIO
A way of expressing the relationship between one accounting result and another, which is intended to provide a useful comparison .Ratios assist in measuring the efficiency and profitability of a company based on its financial reports. Accounting ratios form the basis of fundamental analysis.
Ratio analysis is the most widely used tool since it compares risk and return relationships of firms from various aspects. Ratio analysis is the method or process by which the relationship of items or group of items in the financial statements are computed, determined and presented. It is an attempt to derive quantitative measures or guides concerning the financial health and profitability of a business enterprise. It can be used both in trend and static analysis. There are several ratios at the disposal of an analyst but the group of ratios he would prefer depends on the purpose and objectives of analysis. tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.
ROLE OF RATIO ANALYSIS
Ratio Analysis is one of the best possible techniques available to the management to impart the basic functions like planning and control. As the future is closely