A Study on Using Ratio Analysis to Evaluate a Company's Performance

Abstract

This paper looks at how ratio analysis can be used to assess a company's financial health. Ratio analysis involves calculating different financial ratios from a company's financial reports to understand its profitability, ability to pay short-term and long-term debts, and how efficiently it operates. The paper explains how important ratios—like profitability ratios (Return on Assets, Return on Equity), liquidity ratios (Current Ratio, Quick Ratio), solvency ratios (Debt-to-Equity Ratio), and efficiency ratios (Asset Turnover, Inventory Turnover)—help evaluate the company's overall financial performance. By using these ratios, investors, managers, and other stakeholders can make better decisions about investments, management, and assessing risks. A case study is included to show how ratio analysis is applied to a real company, revealing important financial trends and issues. The research finds that while ratio analysis is helpful, it should be combined with other information for a complete picture of a company’s performance. In conclusion, despite its limitations, ratio analysis is an important tool for financial decision-making.