Importance of ratio analysis

The most important and the most comprehensive source of information on a company is invariably the financial statements of the company. They provide a wealth of information about the company but not strictly in a directly consumable form which can be used by various stakeholders such as analysts, creditors, lenders, management, investors, owners, shareholders and even government officials.

Ratio analysis is the only way in which this mass of information can be organised into a consumable and meaningful form. Ratio analysis helps give meaning to the absolute figures in the financial statements of companies.

Ratios are quantitative tools that enable evaluation of the financial performance of the company. They help understand important parameters of the financial performance of the company such as profitability, liquidity, solvency, asset utilisation and so on and so forth. They help measure the efficiency of the company's operations. They help in locating the weaknesses of the company's operations even though its overall performance may be good. Performance measurement using ratios helps in forecasting trends in the financial performance of the company.

Besides fundamental analysis, ratios facilitate financial evaluation of the worth of an enterprise. They help in valuing an enterprise and estimating the period in which investments into a company/business can be recovered.

Ratios facilitate inter-firm as well as intra-firm comparison of the financial performance of companies. With the help of ratios, it is possible to analyse the performance of one company over the years. Similarly, ratios also facilitate comparison of the financial performance of one company with the financial performances of other companies.

PraXis aims at simplifying learning of ratios for students using financial data of companies from the real corporate world so that they are well conversant with the subject when they step out into the real world.