Use of financial ratios

1. for evaluating the ability of the firm to meet its short term financial obligation as and when they fall due
2. To interpret the performance of the firm over the period covered by the financial statements.
3. For comparison of the performance of the firm this can be done in the following ways

  • Cross sectional analysis-the performance of the firm in question is compared with that of individual competitive firms in the same industry.
  • Trend/time series analysis-the firm’s performance is evaluated over time.

4. For predicting future performance of the firm.
5. To establish the efficiency of assets utilization to generate sales revenue
6. To establish the extent which the assets of the firm has been financed by fixed charge capital.

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