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Overview: What is Ratio Analysis? Video Lecture | Accountancy Class 12 - Commerce

49 videos|111 docs|56 tests

FAQs on Overview: What is Ratio Analysis? Video Lecture - Accountancy Class 12 - Commerce

1. What is ratio analysis?
Ans. Ratio analysis is a financial analysis technique used to evaluate and interpret the financial performance and health of a company by analyzing the relationships between different financial variables. It involves calculating and comparing various ratios, such as liquidity ratios, profitability ratios, and solvency ratios, to assess the company's financial position and make informed business decisions.
2. How is liquidity ratio calculated?
Ans. Liquidity ratios measure a company's ability to meet its short-term obligations. The most commonly used liquidity ratios are the current ratio and the quick ratio. The current ratio is calculated by dividing current assets by current liabilities, while the quick ratio is calculated by subtracting inventory from current assets and dividing the result by current liabilities.
3. What does a high profitability ratio indicate?
Ans. A high profitability ratio indicates that a company is generating a significant profit in relation to its sales or investments. It suggests that the company is efficient in managing its resources and has a strong financial performance. Investors often look for high profitability ratios as it indicates potential returns on their investments.
4. How can ratio analysis help in decision making?
Ans. Ratio analysis provides valuable insights into a company's financial performance, liquidity, profitability, and solvency. It helps in identifying the company's strengths and weaknesses, evaluating its financial health, and comparing it with industry benchmarks or competitors. This information aids decision making by enabling managers, investors, and lenders to assess the company's ability to generate profits, manage risks, and meet its financial obligations.
5. What are some limitations of ratio analysis?
Ans. While ratio analysis is a useful tool, it has certain limitations. It relies heavily on financial data, which may not capture the complete picture of a company's performance. Ratios are also highly influenced by accounting policies and can be manipulated. Additionally, ratio analysis does not consider external factors such as industry trends, economic conditions, or market competition, which can impact a company's performance. Therefore, it is important to consider these limitations and use ratio analysis as one of several tools for decision making.
49 videos|111 docs|56 tests

Up next

Profitability Ratios
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Solvency Ratios
Video | 08:47 min
Liquidity Ratios
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