The calculation and comparability of ratios that have been extracted from the data present in the financial statements of a company is called financial ratio analysis. The historic patterns of these ratios are also used to have observations about the financial state, charm and performance of a company to invest money in.
Financial ratio analysis is used to find the success rates, disabilities, advancements and potentials of a business. Balance sheet, income statements are important but they just start the financial analysis of a particular business. Through financial ratio analysis business holders espy the business trends and the performance and state of their business can be compared with the businesses of the same kinds. For this the ratios are compared with other businesses that are similar. And to find out the progress of a particular business financial ratio analysis should be used to compare the ratios with the previous ratios of the same business, and by this the trends that have been proved favorable can be spotted and continued for further successes.
The financial ratio analysis warns the business owners for some upcoming problems in the business and thus they can be demolished before even occurring. But it is crucial to be remembered while carrying out the financial ratio analysis that the financial ratio analysis also works on the law of ‘Garbage in… Garbage out’; like computer programming! If incorrect or useless information would be tried to be found out, the results would be even worse than the input.
The four main types of ratios that are analyzed to carryout the financial ratio analysis are as follows:
Working capital ratios.
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