What are the types of ration analysis? Mention the uses and applications of ratio analysis?

Answer 1

Types of ratio analysis:

1. Liquidity ratios: These ratios measure a company's ability to meet its short-term financial obligations.

2. Profitability ratios: These ratios measure a company's ability to generate profits relative to its expenses and other costs.

3. Efficiency ratios: These ratios measure how effectively a company is using its resources to generate revenue.

4. Solvency ratios: These ratios measure a company's ability to meet its long-term financial obligations.

Uses and applications of ratio analysis:

1. Performance evaluation: Ratio analysis helps in assessing a company's financial performance over time and comparing it with other companies in the industry.

2. Financial planning: Ratio analysis helps in forecasting future financial trends and making informed decisions regarding investments, expansions, etc.

3. Risk management: Ratio analysis helps in identifying potential risks and weaknesses in a company's financial structure and implementing strategies to mitigate them.

4. Investor decision-making: Ratio analysis helps investors in evaluating the financial health and stability of a company before making investment decisions.

5. Benchmarking: Ratio analysis helps in comparing a company's financial performance with industry standards and best practices to identify areas for improvement.