What are the objectives and advantages of ratio analysis?

Answer 1

Objectives of ratio analysis:

1. To assess the financial performance of a company by comparing ratios with past performance, industry averages, or competitors.
2. To evaluate the efficiency and effectiveness of the company's operations and management.
3. To identify areas of strength and weakness within the company.
4. To make informed decisions regarding investments, loans, and other financial matters.
5. To monitor the financial health of the company over time and identify trends.

Advantages of ratio analysis:

1. Simplifies complex financial data: Ratio analysis provides a clear and simple way to interpret and analyze financial information, making it easier for stakeholders to understand the company's financial situation.
2. Facilitates comparison: Ratios allow for easy comparison of different aspects of a company's finances, both internally over time and externally with other companies or industry averages.
3. Helps in decision-making: By providing insights into the company's financial performance and position, ratio analysis helps in making informed decisions regarding investments, loans, and other financial matters.
4. Identifies trends and potential issues: Ratio analysis can help in identifying trends and potential issues within the company's financials, allowing for proactive steps to be taken to address them.
5. Provides a benchmark for performance: Ratios can serve as a benchmark for measuring and evaluating the company's financial performance against industry standards or competitors, helping in setting goals and targets for improvement.