Concept of Ratio Analysis

Absolute figures are valuable but they standing alone convey no meaning unless compared with another. Accounting ratio show inter-relationships which exist among various accounting data. When relationships among various accounting data supplied by financial statements are worked out, they are known as accounting ratios.

What is a ratio?

Ratio analysis is a means for financial analysis. Ratio is a mathematical relationship between two accounting figures. They show the relationship between two items in a more meaningful way which help us to draw certain conclusions. Ratios may be used to compare the previous data, to compare one firm with another firm etc. the ratios can be expressed as percentage or proportion or times based on the nature of ratio.