Definition of Ratio Analysis

Ratio analysis is the study of a set of financial indicators to assess a company’s performance and financial health. Ratio analysis can include financial indicators to assess the profitability, liquidity, leverage, and other aspects of the company. The ratio analysis can be performed for various reasons, for example, an investor can use profitability ratios to make an investment decision, management can use liquidity ratios to assess any need for additional funds, and also potential acquirer can use ratios to estimate the takeover offer that can be made to a target company.

Liquidity ratios include current ratio, quick ratio, inventory turnover, account receivable turnover, and accounts payable days. Profitability ratios can include profit margins, return on assets, return on equity, ROIC, etc. Leverage ratios include ratios like gearing ratio, debt to equity ratio, interest coverage ratio, etc.