What is Ratio Analysis? Financial Ratio Analysis Introduction

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What is Ratio Analysis?
Financial Ratio Analysis Introduction.

Any accountancy student or those interested in bookkeeping will come across Financial Ratio Analysis. It is a fundamental financial statement analysis technique using data from the financial statements.

What is ratio analysis:
The Assumption...
* We as business managers or investors want to make better financial decisions.
e.g.
Do I buy, sell or hold this stock?
What strategy or actions should my business undertake?
* We have access to financial statements (accounting information)
to help us make these decisions
- Income Statement
- Balance Sheet
- Cash Flow Flow Statement

Ratio Analysis is a Financial Statement Analysis Technique

* Financial Statements only show absolute numbers in their results
and thus some valuable accounting information can be disguised:
* You would need to adjust absolute numbers for scale both
within and across businesses
* You cannot see relationships across the statements and across time with absolute numbers alone.
* Ratio Analysis takes data from the financial statements and uses this data as inputs into common (ratio) calculations
* And these calculations result in NEW accounting information in the form of ‘ratios’ that overcome many of the drawbacks earlier mentioned while also offering new insights/views into the business.

Example:

Liabilities (on the Balance Sheet) = 2,000
Assets (on the Balance Sheet) = 8,000

‘Debt Ratio’ = 2,000 / 8,000
= 25.0%

Can now ‘more easily’ see:
* What proportion of assets are financed by debt (assess financing strategy)
* The ability of the business to pay off all it’s debt (asses financial risk).

Ratio Analysis allows business traits from the financial statements:
* To be seen easier
* Understood more readily
* In a shorter space of time

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Ever wanted to know (exactly) what is Ratio Analysis? If so, watch this quick 5-min video.
Feel free to comment/post if you require any further clarification.
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Axel