RATIONALE AND CONTEMPLATION OF RATIO ANALYSIS
RATIONALE AND CONTEMPLATION OF RATIO ANALYSISAuthor: DR.R.SRINIVASAN Ratios are highly essential profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, you can identify trends, good and bad, and adjust your business practices accordingly. You can also see how your ratios stack up against other businesses, both in and out of your industry. There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies. If you are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span. When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms. When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used.
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