Ratio analysis is a means of making an analysis of a company’s financial statements. There are many different ways to go about this analysis that take into account different factors such as year to year, company to company and also the economies effect on the company. Different kinds of analyses are profitability ratios, liquidity ratios, solvency ratios, measures of managerial effectiveness, and stock market ratios. The most important of the ratios would have to be the profitability ratios. This ratio shows how profitable a company is. This is very helpful information from the stakeholders to the stockholders.
Some examples in how these rations are used in the daily decision making process at different companies is they can show one year to a past year and then the company can take into account some other factors such as sales, employees, or even different times of the year to see how the numbers went up or went down. These analyses can also compare two companies that sell the same or almost the same kind of products and tell the company doing the analysis if there are any ways to improve or streamline some of their business practices to make more profit.
Liquidity ratios tell a company how capable they are to pay off debts and how fast they can pay back creditors. Profitability ratios tell a company how much of a profit they are taking to the bank. Solvency ratios tell a company shows debts and investments that a company has. The limitations of ratio analysis are that the analysis is all about the numbers. They show declines and increases in profit they show changes in percent from one point to the next. They show profit and debt. But if it is not a number it does not get shown. Other factors greatly influence a company’s bottom line such as employees, the season, and customer tendencies. Different user groups focus on different ratios for very many