• Purpose of Ratio Analysis
  

Ratio Analysis is one of the important steps in analysing financial statements. Ratio analysis is useful in analysing financial health of the company. It analyses how the company is doing from perspective of liquidity, efficiency, profitability and solvency. Ratio analysis also helps in identifying weakness of a company and then creating action plan to work on that weakness. From the perspective of investors ratio analysis helps in analysing the performance of company from fundamental perspective and the returns company can generate of investors in long-term. Sometimes ratio analysis helps in comparing the performance of the company with its peers and then analysing it from the perspective of in industry benchmarks to judge the comparative performance of the firm to be analysed.

• Two ratios that measure profitability
  

Operating Profit Margin = Operating Profit / Net Sales

• Two ratios that measure liquidity
  

Quick Ratio = (Current Asset-Inventories)/Current liabilities

• Two Ratios that measures debt management
  

Debt service coverage ratio = DSCR = (Annual Net Operating Income) / debt services = (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments

• Two ratios that measures Asset management
  

Price to earnings = Price per share/Earnings per share

Comparative analysis on the other helps in comparing the performance of the company with its peers. It generally measures the performance of the company on various parameters like profitability, liquidity, solvency, and efficiency and then compares it with various industry benchmarks to judge whether a firm is performing below or above the industry average.