One of the most common tools that help in managerial decision making is known as Financial Ratios. Ratio refers to the quantitative relationship between the two values. The ratio is simply a comparison. Financial Ratios involve a comparison of different figures from the accounting statements to know about more information about the performance of the business. Business Managers find it useful as it helps to interpret the data. The financial ratios are used to find the performance of the business in terms of cost-effectiveness, asset utilization, liquidity, control or market assessment.
Financial ratio popularly known as accounting ratio is regarded as a comparative degree of 2 numerical values which are taken from the financial records of a business enterprise. It can be used by the managers, existing shareholders and the creditors of the firm. These ratios help in scrutinizing the strengths and weaknesses of a particular firm and to examine its financial condition.
Financial Ratios are roughly classified on the basis of the aspect of the company’s financial statements. These are Liquidity Ratios, Solvency Ratios, Profitability Ratios, and Activity Ratios.