Q.What is meant by Ratio Analysis? State its utility (usefulness) to any three users of accounting information.

A ratio turns two related figures from the accounts into a single number that is far easier to read and compare than the raw statements.

Ratio Analysis expresses the relationship between two related figures of the financial statements as a ratio, a percentage, or a number of times. It is useful to management (to plan and control), to short-term creditors (to judge liquidity), and to investors (to judge earning capacity and safety of investment).

Meaning. Ratio Analysis is a tool of financial-statement analysis in which the relationship between two related figures - drawn from the Balance Sheet or the Statement of Profit and Loss - is expressed as a ratio (e.g. 2 : 1), a percentage (e.g. 30%), or a number of times (e.g. 8 times). By reducing large rupee figures to a single comparable number, it makes a firm's financial position and performance quick to interpret.

Utility to different users (any three):

1. Management - uses ratios to plan operations, control costs, and judge the firm's own efficiency, liquidity, and profitability.
2. Short-term creditors and suppliers - use liquidity ratios (Current, Quick) to judge whether the firm can pay its near-term dues before extending credit.
3. Owners, shareholders, and prospective investors - use profitability and return ratios to judge earning capacity and the safety of their investment.
4. Long-term lenders / debenture holders - use them to judge the firm's ability to service and repay long-term debt.

Students sometimes define a ratio merely as 'comparing any two numbers' - the two figures must both come from the firm's own financial statements and bear a genuine, meaningful accounting relationship (e.g. Current Assets to Current Liabilities); an arbitrary comparison of unrelated figures is not a meaningful accounting ratio.