Why ratio analysis is important?

Ratio analysis does two things, immediately. The first thing is it allows the company to compare itself with other like companies. If management feels things aren't going well, they can help pinpoint the problem through comparing their ratiOS with other companies. They may have several ratiOS that are comparable, but a couple which are way off. That might be where the problem is.

Also, ratio analysis may help by comparing your company with prior periods. If a particular ratio is declining when it would be better if it were staying the same or increasing, then again looking at the ratiOS are important to find out where the problem lies.

RatiOS are important to spot trends easily mohit rastogi iipm New Delhi