Financial statements provide financial data, which requires analysis, interpretation and comparison. Internal users use this analysis for evaluating the efficiency of the management while the external users use it to decide upon whether or not the firm is a good investment. Thus, we see that besides financial statements, its analysis and interpretation is also very important. This analysis and interpretation of financial statements and their comparison with others form the major part of ratio analysis.
Financial ratio analysis is the calculation and comparison of ratios, which are derived from the information given in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment.
Ratio analysis is a very powerful tool used for measuring performance of an organization. It concentrates on the inter-relationship among the figures appearing in the financial statements. It helps to analyze the past performance of the firm and also to make further projections. It is a process of comparison of one figure against another, which makes a ratio, and the appraisal of the ratios to make proper analysis about the strengths and weaknesses of the firm's operations. The actual calculation of ratios is pretty simple as it is an application of the necessary formulae; however, it is the analysis of these ratios, which is significantly a complicated task, even for a skilled analyst.
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