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Chapter: 12th Accountancy : Ratio Analysis

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Advantages of ratio analysis

Following are the advantages of ratio analysis:

Advantages of ratio analysis


Following are the advantages of ratio analysis:

 

Measuring operational efficiency: Ratio analysis helps to know operational efficiency of a business by finding the relationship between operating cost and revenues and also by comparison of present ratios with those of the past ratios.

 

Measuring financial solvency: Ratio analysis helps to ascertain the liquidity or short term solvency and long term solvency of a business concern.

 

Facilitating investment decisions: Ratio analysis helps the management in making effective decisions regarding profitable avenues of investment.

 

Analysing the profitability: Ratio analysis helps to analyse the profitability of a business in terms of sales and investments.

 

Intra firm comparison: Comparison of efficiency of different divisions of an organisation is possible by comparing the relevant ratios.

 

Inter firm comparison: Ratio analysis helps the firm to compare its performance with other firms.

 

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