Ratio analysis plays a vital role in maintaining finanacial accounting statements which helps us to compare Industrys performance with the set standards. This way one can analyse company is finanacially sound enough to carry out its business.

Accounting Numbers and Figures are more meaningful when they are used in comparison with other measures, numbers and figures. A Ratio does exactly this thing, it compares two (or more) measures or figures to provide meaningful information and deeper insights into business performance.

For e.g. there are two companies both of which manufacture edible oil, Balaraj & Co and Suhaib & Co. Data about them is as follows :

Balaraj & Co. - Net Sales Revenue:Rs.1,500,000, Net Average Total Fixed Assets:Rs.500,000

Suhaib & Co. - Net Sales Revenue:Rs.2,000,000, Net Average Total Fixed Assets:Rs.1,000,000

If you look at individual figures it looks as if Suhaib & Co. is performing much better isn't it. Because of higher sales revenue and more asset base. BUT real kahani kuchh aur hay. To find out which company is more efficient you have to compare two measures and that's where Ratio Analysis comes into play.

Lets calculate Asset Turnover ratio to see which company is performing better. Asset Turnover Ration is Net Annual Sales divided by Net Average Fixed Assets.

Balaraj & Co. : Rs.1,500,000/500,000 = 3 times

Suhaib & Co. : Rs.2,000,000/1,000,000 = 2 times.

Matlab ye ki Balaraj & Co. kamti (ya thhoray) Fixed Assets say jiyada Sales Revenue generate kar raha hay. And Suhaib & Co. jiyada Fixed Assets kay saath fir bhi utni Sales Revenue nahi generate kar pa raha. This means that Balaraj & Co is performing much better and is more efficient.

Until you were focusing on individual figures you did not know this secret. but Ratio Analysis unlocked this secret for you. Hope you have understood my point. Need more help just let me know.