Advantages  of Ratio Analysis When employed correctly, ratio analysis throws light on many problems of the firm and also highlights some positives. ... It simplifies complex accounting statements and financial data into simple ratios of operating efficiency, financial efficiency, solvency, long-term positions etc.

The ratio is a mathematical term used to compare one quantity with another. In financial analysis, ratio analysis is a method used to evaluate a company's financial performance by analyzing the relationship between different financial variables.

Advantages of Ratio Analysis:
- Easy to understand: Ratios are simple to calculate and easy to understand, making them accessible to a wide range of users.
- Comparative analysis: Ratios allow for comparisons between different companies, industries, or time periods, providing valuable insights into performance.
- Identifying trends: Ratios can help identify trends in a company's financial performance over time, highlighting areas of strength or weakness.
- Decision-making: Ratio analysis can assist in making informed decisions regarding investments, credit lending, or strategic planning.

Disadvantages of Ratio Analysis:
- Limitations of financial data: Ratios are based on historical financial data, which may not accurately reflect future performance.
- Complexity: Some ratios are more complex and may require a deeper understanding of accounting principles to interpret correctly.
- Industry differences: Ratios can vary significantly between industries, making comparisons challenging.
- Manipulation: Companies may manipulate financial data to improve their ratios, leading to inaccurate analysis.
In conclusion, while ratio analysis offers valuable insights into a company's financial performance, it is essential to consider its limitations and use it in conjunction with other financial analysis methods for a comprehensive evaluation.