Advantages of ratio analysis
1) Helpful in financial analysis: financial analysis is easier if accounting ratios are used to analyze the different financial statement relation to financial position of the business, whether it is relation to short term solvency or long term solvency of the enterprise. Balance sheet and profit and loss a/c are to be analyzed by the users.
2) Helpful in explaining financial health of the enterprise: ratio analysis is used to indicate financial health of the business, i.e debt/equity ratio can be calculated.
3) Healthful in locating shortcomings/weaknesses: the financial analyst can also point out the deficiencies of the business so that corrective steps may be taken accordingly.
4) Helpful in future forecasting: as we know that accounting ratio are very important tools in the hands of management. They are also helpful in predicting future forecasts preparing budgets etc.
5) Helpful in comparing inter firm performance: interim comparison is possible through ratio analysis.
6) Helpful in simplifying accounting figures: as we know that absolute figures carry no useful information such as profit of X co are 5 lacs but if profits are related to capital employed or sales then it given a useful and meaningful information. Ratio analysis helps in making or simplifying such figures.
7) Helpful in assessing operation efficiency of the business: operating efficiency of the enterprise can be judged by calculation certain accounting ratios. These ratios are related to solvency liquidity and profitability of the business enterprise. Therefore we see that ratio analysis plays a important role in the field of business finance. In order to provide quick and accurate results, analysis of financial statements is possible by accounting ratios.