Tools of Operational Analysis- Ratio Analysis •Ratio analysis is a method of analyzing the financial statements to determine various relationships between selected items reported on financial...

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Answered Same DayDec 21, 2021

Answer To: Tools of Operational Analysis- Ratio Analysis •Ratio analysis is a method of analyzing the financial...

David answered on Dec 21 2021
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Introduction
Financial analysis gives the clear outlook of the performance parameters of an organization. It
helps in analyzing and comparing the present as well past performance. This analysi
s is a
significant instrument for the management, investors as well as the outsiders who deal with
organization. This analysis presents the way of functioning and the direction in which an
organization is moving.
Ratio Analysis
Ratio Analysis is one of the most widely used instrument of financial analysis. It is basically an
effort to formulate a useful relationship between individual items or group of items in the
balance sheet or income account. The use of ratio analysis is restricted not only to the internal
parties but to the credit suppliers, banks and lending institutions also. Ratio Analysis gives
information about the financial position of the company as to whether the capital structure of the
business is appropriate, whether the credit policy in respect to sales and purchases is reasonable
and whether the company is creditworthy. Thus, ratio analysis highlights the liquidity, solvency,
profitability and capital gearing position.
Liquidity Ratios:
Liquidity ratios are used to calculate firm’s short term obligations. It assists in comparing short
term obligations with short term funds available to pay off these obligations. Liquidity ratios
indicate the relationship of a firm’s cash and other current assets to its current liabilities.
Current Ratio: This ratio shows the proportion to which current liabilities are covered by current
assets.
Current Ratio=Current Assets/Current Liabilities
Current ratio of a company should be at least 2 times, i.e. current assets should be twice as
current liabilities of any firm.
Greater the current ratio, higher is the firm’s ability to meet its short term obligations. We can
see that current ratio of the company is very poor and it needs to improve...
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