Question

Clarify any five advantages of ratio analysis.

Hint:

Simplification, comparison, forecasting, liquidity/solvency/profitability assessment, and better decision-making.

Answer 1

Step 1: Frame the benefits around ‘who uses them and why’:
Management uses ratios to plan and control operations; investors use them to judge profitability and risk before investing; creditors use them to judge whether the firm can repay debts; regulators/analysts use them to compare firms fairly.

Step 2: Distil this into five distinct, non-overlapping advantages:
(i) Makes complex statements simple and readable, (ii) enables performance comparison across time and across firms, (iii) reveals liquidity and solvency position clearly, (iv) reveals operating efficiency and profitability, and (v) supports sound, evidence-based decisions by all classes of stakeholders.

Final Answer:
Any five of: simplifies financial data, aids comparison (inter-firm/intra-firm), aids forecasting and planning, reveals liquidity/solvency, reveals profitability/efficiency, and supports better decision-making for management, investors, and creditors.