What is Ratio Analysis?
Ratio analysis is a quantitative financial analysis technique that examines relationships between financial statement items to evaluate organizational performance, liquidity, efficiency, profitability, and solvency. Common ratios include current ratio, debt-to-equity, return on assets, profit margin, and inventory turnover.
Analysts compare ratios against historical trends, industry benchmarks, or competitors to assess financial health and identify concerns or strengths. In accounting practice, ratio analysis supports audit procedures, credit assessments, investment decisions, and management reporting.
This analytical tool converts absolute financial figures into meaningful relative measures, enabling comparisons across different-sized organizations and time periods. Ratio analysis provides insights that raw financial data alone cannot reveal, supporting informed business decisions.
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