Advantages Of Ratio Analysis
Following are some of the advantages of ratio analysis:
- Simplifies financial statements: Ratio Analysis simplified the comprehension of financial statements. Ratios tell the whole story of changes the financial condition of the business.
- Facilitates inter-firm comparison: Ratio Analysis provides date for inter-firm comparison. Ratios highlight the factors associated with successful & unsuccessful firms. They also reveal strong firms & weak firms, over-valued & undervalued firms.
- Makes intra-firm comparison possible: Ratio Analysis also makes possible comparison of the performance of the different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past & likely performance in the future.
- Helps in planning: Ratio Analysis helps in planning & forecasting. Over a period of time a firm or industry develops certain norms that may indicate future success or failure. If relationship changes in firms data over different time periods, the ratios may provide clues on trends and future problems.
Thus “Ratio can assist management in its basic functions of forecasting planning coordination, control and communication”.
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