Ratio Analysis — Meaning, Advantages and Classification

Ratio Analysis is the technique of expressing the mathematical relationship between two related figures drawn from the financial statements as a proportion, a rate, or a percentage, so as to interpret the firm's financial performance and position more precisely than a comparative or common-size statement alone can. Where the Comparative and Common-Size Statements (Section 9.3) show CHANGE and PROPORTION at a broad level, a ratio distills one specific relationship — say, current assets to current liabilities — down to a single, precise, easily-remembered number.

Advantages of Ratio Analysis

• Simplifies complex financial data into an easily understood, single figure.
• Helps in inter-firm and intra-firm comparison (this year vs last year; this firm vs a competitor).
• Helps forecast and plan for the future, based on established trends.
• Helps management identify problem areas needing corrective action.
• Assists in judging the operating efficiency and financial soundness of the business.

Classification of Accounting Ratios

Accounting ratios are classified by the aspect of financial health they measure. This chapter, part of the Maharashtra HSC (MSBSHSE) Std XII Book-Keeping and Accountancy course, groups them into four heads: