19.1 SIGNIFICANCE OF RATIO ANALYSIS
The relationship between two items of financial data expressed in the form of a ratio and then interpreted with a view to evaluating the financial condition and performance of a firm, form the basis of financial ratio analysis. Any evaluation of this type is not only necessary for the management, but also necessary for outsiders who are interested in the performance of the firm. For example, creditors are interested in the firm’s ability to meet their claims, they would therefore need to evaluate the firm’s liquidity. Security analysts would be interested in the evaluation of the firm as an investment prospect. They would evaluate with the help of ratio analysis the desirability of the firm’s shares and debentures ...
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