Question

Write two objectives of Ratio Analysis.

Hint:

Ratio analysis makes financial statements easier to interpret by converting raw numbers into meaningful relationships.

Answer 1

Ratio analysis helps in understanding the financial condition of a business by comparing different financial figures from the statements. One important objective is to evaluate the profitability, liquidity, solvency and efficiency of the firm through meaningful ratios. This helps management and stakeholders understand how effectively resources are being used. Another objective is to assist in decision making by highlighting strengths and weaknesses in financial performance. Ratios allow comparison over time and with other firms in the industry, helping identify trends and areas requiring improvement. By simplifying complex financial data into simple numerical indicators, ratio analysis becomes a useful tool for planning, forecasting and evaluating overall business health.