Advantages of Ratio Analysis

The benefits of ratio analysis include a quick and easy approach to analyzing a business’s financial results, the ability to compare firms, and the ability to spot patterns and shifts over the years. Here are some of the advantages of Ratio Analysis:

1. Planning: Through doing trend analysis, it aids in predicting and planning.
2. Estimation: By analyzing prior trends, it is possible to estimate the firm’s budget.
3. Informative: It gives users accounting information and important information about the business’s performance.
4. Solvency: It aids in determining the firm’s liquidity as well as its long-term solvency.
5. Comparison: It helps in the comparison of different firms on various scales as well as inter-firm analysis.

A financial ratio, also known as an accounting ratio, is the size of two numerical values obtained from an organisation’s financial accounts. There are several standard ratios used in accounting to try to analyze the overall financial state of a firm or other entity. Accounting ratios, also known as financial ratios, are used to calculate a company’s performance and profitability based on its financial records. They provide a means of expressing the relationship between one accounting data item along with another and are the origin of ratio analysis. To put it another way, an accounting ratio denotes a quantitative agreement that is used for making decisions and analyses. It serves as the foundation for both intra and inter-firm comparisons.

What are Accounting Ratios?

Accounting ratios are the quantifiable or numerical connection between two accounting data used to assess a company’s performance. Ratios are used to compare many aspects of a company, such as revenue, liquidity, solvency, and efficiency, and can be stated as a percentage, fraction, or decimal. Accounting ratios are those that are determined using financial data documented in a company’s financial statements.