Ratio analysis is a tool of financial analysis used to interpret the financial statements so that the strengths & weaknesses of a firm as well as its historical performance & current financial condition can be determined. Ratios are used for comparison with related facts. Comparison involves i) trends ratio, comparison of ratios of a firm over time. ii) inter-firm comparison, iii) comparison of items within a single year’s financial statement of a firm & iv) comparison with standards or plans.
Ratios are classified into 4 broad groups:-
i) Liquidity ratio
ii) Capital structure/leverage ratio
iii) Profitability ratios &
iv) Activity ratios.
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