SAGE Books - Financial Ratio AnalysisBy Saniya Siddique Leave a Comment. Financial Statement Analysis. The purpose and importance of ratio analysis are to evaluate or analyze the financial performance of the firm in terms of Risk, Profitability, Solvency, and Efficiency. It helps us to compare the trends of two or more company over a period of time. Interpretation of the financial statements and data is essential for all internal and external stakeholders of the firm. With the help of ratio analysis, we interpret the numbers from the balance sheet and income statements. Every stakeholder has different interests when it comes to the result from the financial like the equity investors are more interested in the growth of the dividend payments and the earnings power of the organization in the long run.
Importance of Ratio Analysis
Importance and Uses of Ratio Analysis
Use the link below to share a full-text version of this article with your friends and colleagues. Learn more. This chapter explains and illustrates financial ratios, which are one of the tools of financial analysis. Financial analysis is among the many tools helpful in valuation as it helps the chief financial officer CFO gauge returns and risks. There are as many different financial ratios as there are possible combinations of items appearing on the income statement, balance sheet, and statement of cash flows. Financial analysis provides information concerning a firm's operating performance and financial condition; however, financial ratio analysis cannot tell the entire story and must be interpreted and used with care. Financial ratios are helpful; however, the ratios do not reveal complete information.