Chapter 1

Nature of Financial Ratios

The Present Chapter

This chapter discusses the concept of financial ratios with their types, importance, and objectives.

Financial Ratios: Overview

“Ratio analysis” is an important technique of financial statement analysis. Financial ratios are useful indicators of a firm’s performance and financial situation. They are important tools that help in judging the ­profitability, efficiency, liquidity, and solvency of an entity. They help in analyzing the trend of the firm’s growth over the years. They are also helpful in ­forecasting and enabling management to set specific goals that are realizable.

It is important to choose financial ratios that are applicable to the business at hand. There are hundreds of financial ...

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