RATIO ANALYSIS

A company's financial information is contained in 3 basic financial statements the balance sheet, the trading and profit and loss account and profit and loss appropriation account. These statements are very useful to different parties concerned such as management, creditors, investors and so on. These statements may be more fruitfully used if they are analysed an interpreted to have an insight into the strengths and weakness of the firm.

Analysis of statements means such a treatment of the information contained in the two statements as to afford a diagnosis of the profitability and financial position of the firm concerned. In the analysis of financial statements, the analyst has variety of tools available from which he can choose those best suited to his specific purpose.

The most important tools used now days are ratio analysis, fund flow analysis and comparative and common size statements.

Ratio Analysis

Ratios are well known and most widely used tools of financial analysis, A ratio gives the mathematical relationship between one variable and another, Accounting ratios are relationships, expressed in quantitative terms between figures which have a cause and effect relationship or which are connected with each other in some manner or the other. The analysis of a ratio can disclose the relationships as well as bass of comparison that reveals conditions and trends that cant be detected by going through the individual components of the ratio.

The usefulness of ratios is ultimately dependent on their intelligent and skilful interpretation.