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One advantage of ration analysis is that it can help to show your business financial performance. For example for Brockly stores can use their Gross profit percentage and Net profit margin to find out just the profitability of the business. Also venture capitalist or loaning to business or bankers use Stock turnover, Current ratio etc. to see if it is worth will to invest in the business. It helps them to determent the solvency and profitability of business by using this account rations.
This is because it can help them to identify early warning signs of trading difficulty. Also it simplifies to the financial statements, for example Brockly stores at the results of their businesses’ ration to get a summary of it financial statement, like profitability and stock turn over. It also sum-up it past financial statement and compares the past and present of the business to see if it is improving or failing.
One disadvantage of Ratios is tools of quantitative analysis, which ignore qualitative points of view. For example the stock turn over ration and Asset turnover only look at the quantity and not if the quality of the product is up to standard. Another disadvantages id , if they are calculated from incorrect accounting data, Ratios would give false result and it would affect how Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc.
Such factors are so significant that a comparison of two companies from different industries might be misleading. Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations. Ratio analysis explains relationships between past information while users are more concerned about current and future information