Ratio analysis is a medium to understand the financial weakness and soundness of an organization. Keeping in mind the objective of analysis, the analyst has to select appropriate data to calculate appropriate ratios. Interpretation depends upon the caliber of the analyst.
Ratio analysis is useful in many ways to different concerned parties according to their respective requirements. Ratio analysis can be used in the following ways:
● To know the financial strength and weakness of an organization.
● To measure operative efficiency of a concern.
● For the management to review past year’s activity.
● To assess level of efficiency.
● To predict the future plans of a business.
● To optimize capital structure.
● In inter and intra company comparisons.
● To measure liquidity, solvency, profitability and managerial efficiency of a concern.
● In proper utilization of assets of a company.
● In budget preparation.
● In assessing solvency of a firm, bankruptcy position of a firm, and chances of corporate sickness.
