RELEVANCE OF RATIO ANALYSIS
Monica Lal
MBA-IT


When it comes to investing, analyzing financial statement information (also known as quantitative analysis), is one of, if not the most important element in the fundamental analysis process. At the same time, the massive amount of numbers in a company's financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, you will be able to work with these numbers in an organized fashion.
 According to Myers,
"Ratio analysis as a TOOL for the interpretation of financial statements help the analyst to have a DEEP PEEP into the data given in statements. Figures in their absolute forms shown in financial statements are neither able to be compared. In fact, they are BASICALLY DUMB. They provide POWER TO SPEAK.”
Ratio-analysis means the process of computing, determining and presenting the relationship of related items and groups of items of the financial statements. They provide in a summarized and concise form of fairly good idea about the financial position of a unit. They are important tools for financial analysis.

On account of above fact plus the utility discussed earlier, the use of ratio-analysis has increased considerably. It is now being used as a device to diagnose the financial health of a business concern. It signifies whether the financial health of a concern is vital, strong, good or poor and weak. Like doctor’s prescription, ratios represent the figures containing the condensed report of the position, progress and problems of a concern. They facilitate the work or gauging the profitability, solvency and activity of the concern. Like management, outsiders, viz., creditors, bankers and shareholders etc.., may also use ratio-analysis as a tool for financial analysis and interpretation. Ratio Analysis may highlight upon the few phases of the business operations in which the outsiders are most interested by ascertaining the arte and directions of change and future potentialities. Thus, ratio analysis is a very powerful tool for both internal and external analysis.  
Ratio-analysis is a concept or technique which  is as old as accounting concept. Financial analysis is a scientific tool.  It has assumed important role as a tool for appraising the real worth of an enterprise, its performance during a period of time and its pit falls. Financial analysis is a vital apparatus for the interpretation of financial statements. It also helps to find out any cross-sectional and time series linkages between various ratios.
Unlike in the past when security was considered to be sufficient consideration for banks and financial institutions to grant loans and advances, nowadays the entire lending is need-based and the emphasis is on the financial viability of a proposal and not only on security alone. Further all business decision contains an element of risk. The risk is more in the case of decisions relating to credits. Ratio analysis and other quantitative techniques facilitate assessment of this risk.
Lenders’ need it  for carrying out the following

  1. Technical Appraisal
  2. Commercial Appraisal
  3. Financial Appraisal
  4. Economic Appraisal
  5. Management Appraisal

It’s a tool which enables the banker or lender to arrive at the following factors :

  1. Liquidity position
  2. Profitability
  3. Solvency
  4. Financial Stability
  5. Quality of the Management
  6. Safety & Security of the loans & advances to be or already been provided

The utility of ratio analysis will get further enhanced if following comparison is possible.

  1. Between the borrower and its competitor
  2. Between the borrower and the best enterprise in the industry
  3. Between the borrower and the average performance in the industry
  4. Between the borrower and the global average.

A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.