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Advantages of Ratios

The accounting ratios offer the following advantages:

(i)    Help in financial statements analysis:
It is easy to understand the financial position of a business enterprise in respects of short term solvency, capital structure position etc., with the help of various ratios. The users can also gain by knowing the profitability ratios of the firm.

(ii)    Help in simplifying accounting figure ferules: The single figures in terms of absolute amounts such Rs. 10 lakhs income, Rs 50 lakhs sales etc. are not of much use. But they become important when relationships are established, say for example, between gross profit and sales or net profits and capital employed and so on.

(iii)    Help in calculating the operating efficiency of the business enter prise: Ratios enable the users of financial information to determine operating efficiency of a business firm by relating the profit figure to the capita employed for a given period.

(iv)    Help in locating weak points of the firm: Ratio analysis would pin point the deficiency of various departments, or branches of a business unit even though the overall performance is satisfactory.

(v)    Help in inter-firm and inter-period comparisons: A firm can compare its results not only with other firms in the same industry but also its own performance over a period fo time with the help of ratio analysis.

(vi)    Help in forecasting: Accounting ratios calculated and tabulated for a number of years enable the users of financial information to determent the future results on the basis of past trends.

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