Ratio analysis is a tool that is used to evaluate the financial performance and position of a company by analyzing various financial ratios. It helps investors, creditors, and management to make informed decisions by comparing the company's financial ratios with its industry averages or with the ratios of its competitors.

There are various types of financial ratios that can be calculated, including liquidity ratios, solvency ratios, efficiency ratios, and profitability ratios. Each type of ratio provides different information about the company's financial performance and position.

Liquidity ratios measure the company's ability to meet its short-term obligations. These ratios include the current ratio, quick ratio, and cash ratio. Solvency ratios measure the company's ability to meet its long-term debt obligations. These ratios include the debt-to-equity ratio and the debt-to-assets ratio. Efficiency ratios measure how well the company is using its assets to generate sales. These ratios include the inventory turnover ratio and the fixed asset turnover ratio. Profitability ratios measure the company's ability to generate profits. These ratios include the return on assets, return on equity, and profit margin.

One of the main advantages of ratio analysis is that it allows for comparison between different companies and industries. This is particularly useful for investors and creditors who are looking to compare the financial performance and position of different companies. However, it is important to note that ratio analysis has its limitations. It is based on historical financial data, which means that it cannot predict future performance. Additionally, different companies may use different accounting methods, which can affect the accuracy of the financial ratios.

In conclusion, ratio analysis is a useful tool for evaluating the financial performance and position of a company. It provides a quick and easy way to compare different companies and industries, and it is particularly useful for investors and creditors. However, it is important to recognize the limitations of ratio analysis and to use it in conjunction with other analysis tools.

## Ratio Analysis: Nature, Uses and Limitations

This ratio is a good sign as it shows that company risk is low and operations produce enough cash to pay bills. Government may base its future policies on the basis of industrial information available from various units. The former may trend upwards in the future, while the latter may trend downwards until each aligns with its intrinsic value. They found that most companies in Sri Lanka have informal working capital policy and company size has an influence on the overall working capital policy formal or informal and approach conservative, moderate or aggressive. Likewise, use of ratios in horizontal analysis indicates whether the financial condition of the firm is improving or deteriorating and whether the cost, profitability or efficiency is showing an upward or downward trend. The level and historical trends of these ratios can be used to make inferences about a companys financial condition, its operations and attractiveness as an investment. This ratio measures the efficiency and profit earning capacity of the firm.

## Conclusion to financial statement Analysis Essay Example

A few basic types of ratios used in ratio analysis are profitability ratios, debt or leverage ratios, activity ratios or efficiency ratios, liquidity ratios, solvency ratios, earnings ratios, turnover ratios, and market ratios. Period of Project: The duration that was taken to complete the project has to be mentioned here. ADVERTISEMENTS: iv Interpretation of the ratios. Ratio analysis is a process used for the calculation of financial ratios or in other words, for the purpose of evaluating the financial wellbeing of a company. As there may be variations in accounting practices followed by different firms, a meaningful comparison of their financial statements is not possible.

## Financial Ratio Analysis: Definition, Types, Examples, and How to Use

Accordingly, long term solvency ratios indicate firms ability to meet the fixed interest and costs and repayment schedules associated with its long term borrowings. Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of the firm. Operating Profit Margin The operating margin of a company, also known as return on sales ROS , is a strong indicator of how effectively it is managed and efficient at creating profits from sales. Today, a family dynasty has been created that leads the way in the local market, catering to the needs of a diverse range of industries, of liquor and pharmaceuticals to soft drinks and cosmetics. Current and acid-test ratios will give an idea about the current financial position of the concern. Conversely, a ratio of more than one means that the portion of assets provided by creditors is greater than that of stockholders.