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Ratio Analysis: SIGNIFICANCE OF RATIO ANALYSIS

MEANING

Ratio is simply a number expressed in terms of another. It refers to the numerical or quantitative relationship between two variables that are comparable. It is a comparison of the numerator with the denominator.

In other words, the ratio means relationship between two figures expressed mathematically. It can be expressed in terms of percentage proportions and quotient too. 

SIGNIFICANCE OF RATIO ANALYSIS

Ratio analysis is an effective and suitable tool of financial analysis. Analysis of financial statement with the support of ratios would guide the management in important decision making, implementation and control. Ratio analysis is an instrument for diagnosing the financial health of an enterprise. The usefulness of the ratio analysis is not only for the financial manager, but also to various parties who are interested to know different purposes of financial information. In the real sense, ratio analysis is based on the accounting data contained in the financial statements. Various classifications of ratios are used for different purposes.