Ratio analysis is one of the techniques of financial analysis where ratios are used as a yardstick for evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance.
Ratio is relationships expressed in mathematical terms between figures. Which are connected with each other in some manner. It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.
The importance of Ratio analysis lies in the fact that it presents facts on a comparative basis. Conclusions can be drawn regarding the liquidity position of a firm. It is useful for assessing the long-term financial viability of a firm. It throws light on the degree of efficiency in the management and utilization of its assets. It helps in inter-firm comparison and comparison with industry averages.