Ratio analysis is one of the prime indicator for analysis in finance.
Ratio analysis is used to evaluate the performance in different areas of an organization. Ratio analysis uses key components present in financial statements for comparison and the ratios (answers) are used as a base for further financial analysis. The financial statements comprises of different cost centers and income centers.
By doing a comparison of two components, we arrive at a barometer indicating the performance.
In financial sense, ratio analysis is comparing two financial components as per the nature of components, and arriving at a logical conclusion. Broadly, the ratios are classified as per their nature.
The classification of the ratios are -
- Liquidity Ratios
- Profitability Ratios
- Activity Ratios
- Investment Ratios
- Leverage Ratios
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