Objectives of ratio analysis
1) Measuring the profitability: we can measure the profitability of the business by calculation gross profit net profit expenses ratio and other.
2) Judging the operational efficiency of business: the operational efficiency of the business can be ascertained by calculating operating ratio.
3) Assessing the solvency of the business: we can ascertain whether the firm is solvent or not by calculation solvency ratio. Solvency ratio shows relationship among total liabilities and total assets. If total assets are lesser than the total liabilities it shows unsound position of the business.
4) Measuring short and land term financial position of the company: we can know the short term and long term financial position of the business by calculation various ratios. Current and liquid ratio indicates short term financial position while debt equity ratio fixed asset ratio and proprietary ratio shows long term financial positions.
5) Facilitating comparative analysis of the performance: every firm has to compare its present performance with the previous and discover the plus and minus points. These points can be located by the calculation of dissimilar ratio. Comparison with performance of other competitive firms can also be made.