
Ratio Analysis - Introduction
You are here
*Please note: you may not see animations, interactions or images that are potentially on this page because you have not allowed Flash to run on S-cool. To do this, click here.*
Ratio Analysis - Introduction
Ratio analysis is an accounting tool, which can be used to measure the solvency, the profitability, and the overall financial strength of a business, by analysing its financial accounts (specifically the balance sheet and the profit and loss account).
Accounting ratios are very easy to calculate and they enable a business to highlight which areas of its finances are weak and therefore require immediate attention.
There are five main categories of accounting ratio:
- Liquidity ratios, these measure the solvency of the business and its ability to meet short-term debts.
- Profitability (or 'performance') ratios, these analyse the profit made over the last year.
- Financial efficiency (or 'activity') ratios, these analyse the efficiency of the business in terms of the use of its resources in generating sales.
- Gearing ratio, this measures the proportion of the capital of the business which has come from external sources, and must be repaid with interest.
- Shareholders' ratios, these measure the strength of the company, its share price and its dividends.