Ratio analysis technique financial analysis

Ratio analysis is a technique of analysis and interpretation of financial statements. it is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end in itself. It is only a means of better understanding of financial strengths and weaknesses of a firm. Calculation of mere ratios does not serve any purpose, unless several appropriate ratios are analysed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has select the appropriate data and calculate only few appropriate ratios from the same keeping in mind the objective of analysis. The ratios may be used as a symptom like blood pressure, the pulse rate or the body temperature and their interpretation depends upon the caliber and competence of the analyst. 

The main steps involved in the Ratio analysis

• Selection of relevant data from the financial statements depending upon the objective of the analysis.
• Calculation of appropriate ratios from the data
• Comparison of the calculated ratios with the ratios of the same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparison with ratios of the industry to which the firm belongs 
• Interpretation of the ratios.