Q.What is meant by Ratio Analysis? State any four of its objectives.

Ratio analysis condenses financial-statement figures into a single, comparable number, making a firm's financial story much easier to read at a glance.

Ratio Analysis expresses the relationship between two related figures of a company's financial statements as a ratio, percentage, or number of times. Four of its objectives are: assessing liquidity, assessing solvency, assessing profitability, and assessing operating efficiency.

Ratio Analysis is a technique that expresses the relationship between two related figures drawn from a company's financial statements — the Balance Sheet and the Statement of Profit and Loss — in the form of a simple ratio, a percentage, or a number of times, so that the firm's financial performance and position can be interpreted quickly and meaningfully, without needing to compare large, raw rupee figures directly.

Four of its principal objectives are:

1. To assess liquidity — whether the firm has enough short-term resources to meet its current obligations as they fall due.
2. To assess solvency — whether the firm can meet its long-term obligations and how it is financed (through owners' funds or borrowed funds).
3. To assess profitability — how efficiently the firm converts its sales into profit, and how well it rewards the capital invested in it.
4. To assess operating efficiency — how effectively the firm is using its assets (inventory, receivables, working capital) to generate sales.

(Other valid objectives include facilitating inter-period and inter-firm comparison, and assisting management, investors, and creditors in decision-making.)

Students sometimes define a ratio narrowly as 'comparing two numbers' without specifying that, in this context, the two numbers must both come from the firm's OWN financial statements and bear a genuine, meaningful accounting relationship to each other (e.g. Current Assets to Current Liabilities) — an arbitrary comparison of unrelated figures is not a meaningful accounting ratio.