Ratio Analysis

Ratio analysis as a tool possesses several important features. The data, which are provided by financial statements, are readily available. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Because ratio analysis is based upon accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, ratio analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm's performance and to identify areas which need to be investigated further.

Autorentext

Dr. B. Nimalathasan is a Senior Lecturer, Department of Accounting, Faculty of Management Studies & Commerce, University of Jaffna, Sri Lanka. He published research papers in refereed journal of national and international repute. He attended and also presented some research papers at national and international conferences.