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What is financial ratio analysis and how is it used?

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Question: What is financial ratio analysis and how is it used?
Answer:

Financial ratio analysis is a valuable tool for your small business. First, you have to learn to calculate the ratios and understand what they mean. They are a comparative tool of analysis for liquidity, profitability, debt, and asset management. These are the major categories of financial ratio analysis.

You need to have industry ratios and/or time series data from your own firm for a basis of comparison. Then, you can compare the ratios for your firm to the ratios of other firms in your industry and other quarters or years of data for your firm.

If you do an accurate financial ratio analysis using comparative data, you can learn a lot about the financial position of your firm and make necessary financial adjustments to enhance your performance.

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