Here are few importance of ratio analysis –
Aid to Measure General Efficiency:
Ratios allow for the summarization and simplification of vast volumes of accounting data. They serve as a measuring stick of the company’s performance. Simply put, they act as a useful tool for effective management.
Aid to Measure Financial Solvency:
Ratios are valuable instruments in the hands of managers and those that are interested in evaluating the firm’s success over time by contrasting the current ratio to previous ones. They highlight the company’s liquidity capacity to achieve its short-term responsibilities as well as its long-term solvency.
Aid in Forecasting and Planning:
Ratio analysis is a powerful method for management in carrying out the core tasks like planning, predicting, and managing. The ratios obtained after reviewing and evaluating previous outcomes aid management in preparing budgets, formulating strategies, and organizing future actions, among other aspects.
Must Read – Advantages & Limitations of Ratio Analysis?
Facilitate Decision-Making:
It sheds light on the current efficiency in asset management and its utilization, They assist managers in making decisions.
Aid in Corrective Action:
Ratio research offers inter-firm contrast. They display the characteristics of productive and failed businesses. If the comparison reveals an unfavorable difference, corrective measures should be taken. As a result, it assists management in taking corrective steps.
Aid in Intra Firm Comparison:
Intra-firm comparisons are made simpler. It is a method for assessing an enterprise’s financial wellbeing. It enables management to determine if the company’s financial condition is strengthening or worsening by establishing a trend using ratios.
Act as a Good Communication:
Ratios are an efficient way of coordination and play an important role in educating the owners as well as other concerned parties about the status and success of the company concerned. The use of condensed and summarized percentages makes correspondence easier and more concise.
When applied correctly, ratio analysis is an excellent tool for assessing critical market characteristics such as liquidity, solvency, profitability, and so on. An analysis of these factors can allow conclusions about market capabilities to be drawn.
Evaluation of Efficiency:
When applied correctly, ratio analysis is an excellent tool for assessing critical market characteristics such as liquidity, solvency, profitability, and so on. An analysis of these factors can allow conclusions about market capabilities to be drawn.
Effective Tool:
Ratio analysis aids in the efficient management of a market by assessing efficiency, controlling costs, and so on. Better management is characterized by efficient monitoring. Ratio maintains confidentiality.
Detection of Unfavourable Factors:
The review of financial statements helps the researcher to assess the feasibility or otherwise of a company. If the study shows financial incorrectness, the reasons accountable for such incorrectness can be identified and corrective steps can be implemented without delay.
Numbers in specific form displayed in financial reports are hardly relevant nor comparable. They are, in truth, a dump. However, percentages have the potential to connect.
