What do you mean by Ratio Analysis?
Ratio Analysis is a technique which involves regrouping of data by application of arithmetical relationships. It is an indispensable part of the interpretation of results revealed by the financial statements. In simple terms, accounting ratios represent a relationship between two accounting numbers.
The objective of ratio analysis is to provide a deeper analysis of the profitability, liquidity, solvency, and activity levels in the business. It helps identify problem areas as well as strong areas of the business that need management's attention.
Ratios are means to an end rather than the end in themselves. Their role is essentially indicative and that of a whistle-blower. If properly analysed, it provides crucial financial information and points out areas which require investigation.
Explanation
The answer is derived from the 'Summary' and '5.2 Objectives of Ratio Analysis' sections of the provided text. It defines the concept as a technique involving arithmetical relationships and establishes it as a tool for interpreting financial statements. The explanation covers the core definition (relationship between two numbers), the objectives (analysing profitability, liquidity, etc.), and the nature of ratios (means to an end), ensuring all facts are strictly from the context.