Ratio is the relationship between two figures.They provide two important facts about the management:the return on investment and the soundness of the company's financial position.
Financial ratios are calculated from one or more pieces of information from a company's financial statements.For example, the "gross margin" is the gross profit from operations divided by the total sales or revenues of a company, expressed in percentage terms.
Financial ratio analysis is well-developed and the actual ratios are well-known, practicing financial analysts often develop their own measures for particular industries and even individual companies.Ratio analysis involves following terms:
Leverage Ratios, Liquidity ratios ,Operational Ratios, Profitability Ratios and Solvency Ratios .
Hence,financial ratio analysis means the calculation and comparison of ratios which are derived from the information in a company's financial statements.For instantance,a gross profit margin for a company of 23% is meaningless by itself. If we know that this company's competitors have profit margins of 10%, we know that it is more profitable than its industry peers which is entirely favourable and suitable.Even though, financial ratio analysis is well-developed and well-known
for practicing purposes in any ways.
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