What Is the Importance of Ratio Analysis?

Ratio analysis is one of the commonly used financial analysis methods. Through the calculation of various ratios, the company's financial status and operating performance in a certain period of time are evaluated. For example, current ratio analysis, quick ratio analysis, etc. Ratio analysis is particularly applicable to the evaluation of different enterprises, because it to a certain extent excludes the incomparability of enterprise scale. ^[1]

Ratio analysis

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Ratio analysis is one of the commonly used financial analysis methods. Through the calculation of various ratios, the company's financial status and operating performance in a certain period of time are evaluated. For example, current ratio analysis, quick ratio analysis, etc. Ratio analysis is particularly applicable to the evaluation of different enterprises, because it to a certain extent excludes the incomparability of enterprise scale. ^[1]

Divided into four categories: liquidity ratio, operating ratio, profitability ratio, leverage ratio.

Ratio analysis includes ratios between balance sheet items or income statement items, which often provide unique perspectives on a company's level of risk and its ability to generate profits for shareholders. The simple calculation of these ratios (often dividing one data by another) and their interpretation is what we call ratio analysis.