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Question #1 In class, I emphasized the importance of performing Ratio Analysis. Required: Provide at least...

Question #1 In class, I emphasized the importance of performing Ratio Analysis.

Required: Provide at least 3 SPECIFIC reasons why performing Ratio Analysis is important

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Answer #1

Three reasons why performing Ratio Analysis is important are :

  1. Ratio analysis enables horizontal analysis - Comparison of the firm's financials (operating performance and financial position) with it's own past performance. This helps evaluate the change in the financials over time
  2. Ratio analysis enables vertical analysis - Comparison of the each item in the firm's financials with a base figure (total sales and total assets). This simplifies financial statement analysis, and quickly enables the analyst to evaluate the importance and impact of each line item
  3. Ratio analysis enables peer analysis - Ratio analysis enables comparison of the firm's operating performance and financial position with other firms in the same industry to gauge the relative performance of the firm with its peers
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