Utility of Ratio Analysis

The ratio analysis is one of the most widely used tools of financial analysis.The various stakeholders in the firm would be interested in the information relating to operating and financial efficiency. They would also be interested in knowing the growth prospect of the firm. The various stakeholders use ratio to determine those financial characteristics of the firm in which they are interested. With the help of ratios, one can determine:

• the ability of the firm to service its current obligations;

• the effect of borrowings on long term solvency;

• the efficiency with which the firm is utilising its assets in generating sales revenue; and

• the overall operating efficiency and performance of the firm.

Performance Analysis

As stated above various stakeholders have different interests in the firm; short-term creditors will be interested in the current financial position, while profitability long-term creditors will be interested in the solvency of the firm.The equity holders are generally concerned with the returns. It is to be noted here that in every kind of financial analysis short and long term financial position along with profitability are tested, but the emphasis would differ depending upon the interest of the stakeholder.