Financial Ratio

A principal tool in financial analysis is the study of financial ratiowhich is computed from various items of the balance sheet and income statement of a business corporation.

Ratio analysis is the most widely used technique for interpreting and comparing financial statements.

These ratios are particularly useful for the purpose of comparing the performance of a company from year to year and for comparing the performance of companies in similar industries.

A large number of percentages and ratios have been developed for use in financial analysis. Some of those ratios have general application while others have more specialized use in specific circumstance.

The choice of ratios to use depends on the objective of the analysis.

These ratios can be grouped into four categories:-

• Liquidity Ratio
• Activity or Efficiency Ratio
• Gearing or Leverage Ratio
• Profitability Ratio

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