MERITS OF RATIO ANALYSIS

[abhishreshthaa]

MERITS OF RATIO ANALYSIS

Following are some of the advantages of ratio analysis:


1. Simplifies financial statements: Ratio analysis simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.


2. Facilitates inter-firm comparison: Ratio analysis provides data for inter-firm comparison. Ratios highlight the factor associated with successful and unsuccessful firms. They also reveal strong firms and weak firms, overvalued and undervalued firms.


3. Makes intra-firm comparison possible: Ratio analysis also makes possible comparison of the performance of the different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.


4. Helps in planning: Ratio analysis helps in planning and forecasting. Over a period of time a firm or industry develops certain norms that may indicate future success or failure. If the relationship changes in firm’s data over different time periods, the ratios may provide clues on trends and future problems.


Thus “ratios can assist management in its basic function of forecasting, planning, co-ordination, control and communication.

 

[Business-education]

Limitations of Ratio Analysis

1. Ratios are tools of quantitative analysis

2. Ratios are generally distorted by inflation.

3. Ratios give flaw result

4. Ratios are calculated on the basis of past data

 

[rosemarry2]

MERITS OF RATIO ANALYSIS

Following are some of the advantages of ratio analysis:


1. Simplifies financial statements: Ratio analysis simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.


2. Facilitates inter-firm comparison: Ratio analysis provides data for inter-firm comparison. Ratios highlight the factor associated with successful and unsuccessful firms. They also reveal strong firms and weak firms, overvalued and undervalued firms.


3. Makes intra-firm comparison possible: Ratio analysis also makes possible comparison of the performance of the different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.


4. Helps in planning: Ratio analysis helps in planning and forecasting. Over a period of time a firm or industry develops certain norms that may indicate future success or failure. If the relationship changes in firm’s data over different time periods, the ratios may provide clues on trends and future problems.


Thus “ratios can assist management in its basic function of forecasting, planning, co-ordination, control and communication.

hey abhi,

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