Understanding Financial Performance – A Conceptual Framework for Ratio Analysis in Financial Statements
DOI:
https://doi.org/10.31305/trjtm2025.v05.n01.003Keywords:
Liquidity, Profitability, Solvency, Cash flow, Revenue, Expenses, Net incomeAbstract
Ratio analysis is a key financial technique that evaluates a company’s performance by examining relationships between different financial statement components. This method helps in assessing profitability, liquidity, operational efficiency, and solvency, enabling stakeholders to identify trends and make meaningful comparisons over time or against industry peers. Investors, creditors, and management rely on ratio analysis to gain insights into a firm’s financial stability and growth potential. By interpreting these ratios, businesses can pinpoint operational strengths, weaknesses, and areas for improvement, supporting strategic decision-making. Additionally, ratio analysis aids in forecasting risks and opportunities, making it an essential tool for financial planning and investment evaluation. Its application extends to credit assessments, performance benchmarking, and long-term business sustainability analysis.
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