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.