Updated on April 21, 2024Table of Contents
Ratio analysis is a fundamental accounting technique used to analyze and interpret financial statements by comparing ratios to industry benchmarks or historical trends. It involves calculating ratios from various financial items and analyzing their relationships to provide insights into a company’s financial performance, liquidity, solvency, and profitability.
Ratio analysis is an important tool for financial analysis and can provide valuable insights into a company’s financial health and performance. By understanding the relationships between various financial items, analysts can gain a deeper understanding of a company’s operations and make informed judgments.
What is ratio analysis?
Ratio analysis is a financial tool used to evaluate a company’s performance by comparing various financial metrics to analyze profitability, liquidity, efficiency, and solvency.
What are the four types of ratio analysis?
The four main types of ratio analysis are liquidity ratios, profitability ratios, efficiency ratios, and solvency ratios. Each type focuses on a different aspect of the company’s financial health.
What is the ratio analysis formula?
The formula for each ratio depends on the type. For instance, the current ratio is calculated as current assets divided by current liabilities, while the gross profit margin is gross profit divided by revenue, multiplied by 100.
What are the 5 profitability ratios?
The key profitability ratios are gross profit margin, net profit margin, return on assets (ROA), return on equity (ROE), and operating profit margin. These ratios measure how effectively a company generates profit from its resources.
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