Main benefits or advantages of ratio analysis can be studied as follows:
1. Financial Position Analysis
Ratio analysis reveals the financial position of the company by analyzing financial statements. It explores the financial health of the business during a particular period.
2. Simplifying Figures
Ratio analysis makes accounting figures meaningful and understandable by everyone by simplifying and summarizing properly and systematically.
Accounting ratios analyze the past financial performance of the business firm. Financial facts of previous period such as cost of good sold, sales, profit margin can be known with the help of ratio analysis. So, it can establish trend for future planning, forecasting and decision making.
4. Exploration Of Weakness
Ratio analysis judges the financial health of the business. It explores the weakness of the business which helps the management to take appropriate remedial measures.
5. Comparison
Ratio analysis helps to compare the financial performance of one firm with others. Inter-firm comparison helps to find out the strength or weakness of the firm and necessary steps can be taken for further improvement.
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6. Measurement Of Operational Efficiency
Ratio analysis helps to measure the working efficiency of the firm with the help of different ratios. Turnover ratio and profitability ratio help the management to know the operational efficiency and financial requirements of the company.
7. Credit Decision
Ratio analysis helps the creditors and investors to make credit decision by providing accurate financial position of the company.
