Ratio_Analysis_Theory12345645678945.pptx

nmvk

1. Ratio Analysis

2. Meaning and Definition Ratio analysis is the process of examining relationships between various items of financial statements to evaluate the financial performance, efficiency, and stability of an organisation . Ratios express one figure in relation to another, providing meaningful insights for decision-making.

3. Objectives of Ratio Analysis 1. To measure profitability, liquidity, and solvency. 2. To evaluate operational efficiency of the business. 3. To provide a basis for inter-firm and intra-firm comparison. 4. To assist management in decision-making and financial control. 5. To simplify complex financial data into understandable indicators.

4. Importance / Advantages of Ratio Analysis 1. Helps in analysing financial statements in a simple manner. 2. Identifies strengths and weaknesses of the firm. 3. Facilitates comparison over years and with other firms. 4. Useful for budgeting, forecasting, and financial planning. 5. Aids in performance evaluation of management and departments.

5. Limitations of Ratio Analysis 1. Ratios are based on historical data and may not reflect future trends. 2. Results depend on accuracy of financial statements. 3. Ratios ignore qualitative factors like management competence and brand value. 4. Different accounting policies reduce comparability. 5. Ratios indicate problems but do not provide solutions.

6. Modes of Expression of Ratio In Propotion In Rate or Times or Coefficient In Percentage

7. Interpretation and Use of Ratios • Ratios must be interpreted in context, considering industry norms and company policies. • A single ratio alone cannot indicate financial health; multiple ratios must be analyzed together. • Trend analysis and comparison with industry averages improve usefulness. • Ratios help management, investors, and creditors assess financial soundness.

8. Role of Ratio Analysis in Decision-Making 1. Management uses ratios for planning and control. 2. Investors assess return on investment and profitability. 3. Creditors evaluate solvency and liquidity before lending. 4. Analysts study ratios to predict company performance and market valuation. 5. Employees and Trade Unions 6. Government and Regulators

9. Precautions in Using Ratios 1. Use only comparable and consistent data. 2. Study several years to identify trends. 3. Compare ratios with industry standards. 4. Consider both quantitative and qualitative factors.

10. Conclusion Ratio analysis is an essential technique in financial analysis that transforms raw accounting data into useful insights. It aids in evaluating profitability, liquidity, and efficiency, helping stakeholders make informed financial decisions. "Ratios serve as the mirror of business performance, reflecting strengths and weaknesses clearly."