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Advantages of Ratio Analysis

ADVANTAGES OF RATIO ANALYSIS

  1. Simplifies financial statement. Financial Statement contains the summary of one year’s financial activities that is, application of Ratio as against the financial statements. The interested people can know the information without any difficulty because the entire financial statement is simplified in an easy manner.
  2. Facilitates intra-firm comparison. Analysis and interpretation of a particular firm over a period of year can be made. And also comparison among different divisions of the organisation is made easy with the help of various ratios.
  3. Planning and Forecasting. Actually ratios are derived from the past financial statements. Ratios give suitable guidance to management for formulating various budgets and construct relevant policies and also to prepare the future plan of action etc.
  4. Aid to inter firm comparison. Comparison between two or more firms is more essential. In this regard, absolute figures are not sufficient to determine the correct comparison of firms. With the help of the ratios, one firm is able to compare with another firm and also find out their position.
  5. Facilitates decision making. Ratios throw light on the degree of efficiency of the management and utilization of the assets. That is why it is called surveyor of efficiency. They help the management in the aspect of decision making.
  6. Helps in corrective action. Ratio analysis facilitates the inter-firm comparison. It exposes the successful and unsuccessful firms. At the time of comparison, if any of the unfavorable variations are identified, immediately the corrective actions should be taken.
  7. Aid to co-ordination. The management wants to establish harmonious and cordial relationship among all the departments in the organisation. Meanwhile, the strength and weakness of the organisation should be communicated in an easily understandable manner. This type of quick and clear communication can achieve better co-ordination.