Ratio Analysis in Financial Accounting

Ratio Analysis in Financial Accounting

We do ratio analysis to evaluate company’s financial position and performance. These ratios are also used to evaluate trend, like compare current year numbers with previous years of the same company or different company in same industry or whole industry or entire economy.

Liquidity Ratios: These ratios tells us if a business have enough money to pay to the creditors. It is also called as short term solvency ratios as it shows us if a business can pay its current liabilities from its current assets. This is more relevant to short term creditors.

Leverage/Solvency Ratios: These ratio tells us the usage of debt money over long run, hence leveraging involves financial risk. It indicates the financial risk that the company is running. These are also called long term solvency ratios. This is of interest to the investors, owners, government etc

Profitability Ratios: To measure overall efficiency and performance. This tells us how much service a company is doing to its owners.

Note: Liquidity and Leverage ratios shows business’ financial position, whereas profitability ratio shows business’ financial performance.

Turnover Ratios: All turnover ratios indicate the efficiency of usage of assets, i.e, the higher the turnover ratio, the better the utilization of assets.

Valuation Ratios: these are market related

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One Response to Ratio Analysis in Financial Accounting

  1. Pingback: Monetary Policy Implementation | Executive Management

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