what do you mean by ratio analysis

Ratio analysis is a quantitative method of analyzing a companys financial statements to gain insight into its liquidity, operational efficiency, and profitability. It involves comparing line items on financial statements such as income statements, balance sheets, and cash flow statements to identify trends and relationships between different financial metrics. Ratio analysis can be used to check various factors of a business such as profitability, liquidity, solvency, and efficiency. It is mainly performed by external analysts as financial statements are the primary source of information for external analysts. The data or information obtained during the analysis is helpful in determining whether the financial position of a company is improving or deteriorating. Ratio analysis can predict a company's future performance, and successful companies generally boast solid ratios in all areas. However, it is important to note that ratios are parameters and not precise or absolute measurements, and several ratios must be analyzed together and compared with prior-year ratios or even with other companies in the same industry.