Ratio analysis is a tool or a technique through which one can do the analysis of the financial statements of the company. There are many advantages of ratio analysis let’s look at some of them –
1. Liquidity ratio can be helpful in measuring the liquidity position of the company that is whether a company will able to meet the obligations as and when they arise.
2. Since ratio is a simplified figure of complex financial statements it can be easily understood by a person who does not have the accounting knowledge.
3. The various profitability ratios help in judging the operation efficiency of the company and also whether or not company using the resources judiciously.
4. With the help of ratios, it is easy to make comparison of a company with other companies in the same industry and determine the position of the company with respect to its competitors.
5. With the help of ratio analysis one can do trend analysis that is whether the financial position of the company is improving or getting worse over the years.
6. As ratios are easy to understand it becomes easy for a company to communicate the ratios to those who are interested in the financial performance of the company.