Advantages of Ratio Analysis

Following are the main advantages of Financial Ratio Analysis:

1) Ratios are easy to understand by all users.

2) It is a very useful technique for comparison purpose. Changes in ratios over time can indicate the firm's performance, and it can also be used to compare with businesses in similar industries.

3) The calculation of profitability ratios can help to measure the profitability and actual performance of the businesses.

4) The use of various liquidity ratios can indicate the short-term financial position of the company.

5) Remedial actions can be taken if weaknesses are found through ratio analysis.

6) Important ratios help the external parties such as shareholders, debenture holders, bankers to know the performance of the company that pay them interest and dividend.

7) The use of ratios simplify accounting information as they summarize the result of detailed and complicated computations.

8) Accounting ratios can indicate the trend of the business line and is useful for forecasting purposes.

9) It helps the company in analyzing the utilization of its various assets and liabilities.

* Next: Financial Leverage Ratio Analysis