What is Ratio Analysis? Different types of Ratios?

Ratio Analysis are considered as a powerful tool among the various tools of financial statement analysis.  It facilitates a company in ascertaining its financial health i.e., its financial performance whether it is gaining profits or suffering losses.


Main Purpose of Ratio Analysis are in ascertaining the financial performance of a concern.
a)  Liquidity Ratio of Ratio Analysis, facilitates to identify whether the company has enough capability to meet short term obligations/requirements.  Current and Quick Ratios reveal  the comparison between Current Assets and Current Liabilities suggest for necessary decision making.


b) The Profitability Ratios like Gross Profit Ratio, Net Profit Ratio and Operating Ratio give a picture of profitability position of the concern.


c) Long term solvency and the leverage ratios such as Debt-Equity Ratio and Interest Coverage Ratio convey a firms ability to meet the interest cost repayments schedules of its long-term obligations and show the proportions of debt and equity in financing of the firms.


d) Activity Ratios such as Inventory Turn Over Ratio, Debtor Turnover Ratio, Working Capital  Turnover Ratio measure the efficiency with which the resources of a firm have been employed.


Though Ratio analysis is a powerful tool for analyzing the financing position of a firm, it suffers from the following limitations.