Ratio Analysis in Finance terms is a specialized financial reporting tool that helps the company to analyze the performance and keep eye on thousands of workers in the company. Ratio analysis let us know about the current position of the company with respect to the performance and financial health on the basis of current and historical data.
Uses of Ratio Analysis
Financial ratio analysis helps a business in a number of ways. There are different most important Managerial Uses of Ratio Analysis are given below:
- Financial Ratios are useful in analyzing and comparing the performance or financial health over a long period of time.
- Ratios are also helpful in the matter of comparing a business’s financial reports with its competitors.
- Ratios Analysis provide assistance in the management in the decision making process.
- These are the major factor by their business point out the problem and weak areas.
- Ratios analysis assist the company in creating a relationship between different financial statement values.
- It doesn’t matter how big the other organization is, With the help of Financial Ratios you can also compare two businesses in terms of their profitability, liquidity, etc.
Users of Financial Ratios | How to use financial ratios
There is a number of entrepreneurs or many other groups having diverse areas and conflicts of interest, but also want to know about their financial position. Enlist down there are major users of financial ratios are described.
(1) Bankers and Lenders: Bankers are the major user of Ratios because in their routine matter it is very essential to know about the ability of the borrowing business. So banks need ratio analysis for evaluating or analyze the financial health of the business in terms of Risk, Profitability regular scheduled interest payments and repayments of principal loan amounts.
(2) Investors: Investors are more interested in the profit and their investment, therefore they are the major user of the Profitability ratio or Net profit margin ratio. in this way, they can know about the profitability of the business, safety, and security of their investment.
(3) Government: Uses profitability ratios for using of profit for different purposes like taxation, grants, subsidies.
(4) Employees: have a major concern about job security, bonus, and continuance of business in the long run, therefore they use profitability, liquidity, and activity ratios.
(5) Customers: need to use profitability ratio because they want assurance that business can survive in the short run and can maintain supply properly or not.
(6) Suppliers: are also the major stack holder/ user. Suppliers use liquidity ratios because they tend to know about the business that if they are able to achieve its payment or short term obligation on its maturity dates.
(7) Management: Use all ratios in order to maintain business operation smoothly. They use Ratios to evaluate the financial performance and financial health of the business.