What is Ratio Analysis?

Ratio Analysis is the process of observing indexes related to accounting on financial statements such as balance sheets, income statements, and cash flow statements with the aim of assessing the financial performance of a company. This analysis is used to provide information about the company’s financial position and performance that can be used as a guide in making business decisions.

Financial ratio analysis is used by two main users, namely investors and management . Investors use financial ratios to see whether a company is a good investment or not. By comparing financial ratios between companies and between industries, investors can determine which investment is best. Whereas management uses financial ratios to determine how well the company’s performance evaluates where the company can improve.

Ratio Analysis Function

To better understand the function of financial ratio analysis your company will be introduced to other types of financial ratios. Budi Raharjo in the book Finance and Accounting (2007: 104) classifies the company’s financial ratios into five, namely:

  1. Liquidity Ratio Liquidity
    ratio is a ratio that measuresthe short-term liquidity capability of a company by looking at the company’s current assets relative to its current debt.
  2. Inventory Turnover Ratio Inventory turnover ratio
    measures the activity or liquidity of a company in terms of the availability of goods. This ratio shows the efficiency in which a company uses all of its assets to generate sales.
  3. Activity Ratio Activity
    ratio shows the level of effectiveness of the use of assets or wealth of the company to you.
  4. Profitability Ratio (Profitability Ratio)
    Is a ratio that shows the level of return or gain (profit) compared to sales or assets.
  5. Investment Ratio Investment
    ratio is a ratio that measures a company’s ability to provide returns or rewards to funders, especially investors who are in the capital market for a certain period of time. The ratio has the value of benefits for investors according to the function of financial statements for investors to assess the performance of stock securities in the capital market.


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