Ratio analysis is the process of examining and comparing financial information by calculating meaningful financial statement figure percentages instead of comparing line items from each financial statement.Managers and investors use a number of different tools and comparisons to tell whether a company is doing well and whether it is worth investing in. The most common ways people analyze a company’s performance are horizontal analysis, vertical analysis , and ratio analysis. Horizontal and vertical analyzes compare a company’s performance over time and to a base or set of standard performance numbers.
Explanation :
Ratio analysis is much different. Ratio analysis compares relationships between financial statement accounts. This means that one income statement or balance sheet account is being compared to another. These relationships between financial statement accounts will not only give a manager or investor an idea of how healthy the business is on a whole, it will also give them keen insights into business operations.
In a nutshell :
- Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
- Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
- While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a broader picture of a company's financial health.
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