Procedure of Analysis of ratios

The procedure for analyzing financial ratios in treasury markets involves the following steps:

Collecting financial statements: The first step in ratio analysis is to collect the financial statements of the company for the relevant period. The financial statements include the balance sheet, income statement, and cash flow statement.

Calculating financial ratios: Once the financial statements are collected, various financial ratios can be calculated using the data available in the financial statements. The ratios can be broadly classified into four categories: liquidity ratios, solvency ratios, profitability ratios, and efficiency ratios.

Comparing ratios with industry standards: After calculating the financial ratios for the company, the next step is to compare them with the industry standards. This helps to identify the company’s strengths and weaknesses compared to the industry.

Analyzing trends: After comparing the ratios with the industry standards, the next step is to analyze the trends in the company’s financial ratios over time. This helps to identify the company’s financial performance over the years and identify any improvements or deteriorations.

Identifying problem areas: The next step is to identify any problem areas in the company’s financial ratios. For example, if the liquidity ratios are lower than the industry average, it may indicate that the company is facing cash flow problems.

Making recommendations: Finally, based on the analysis, recommendations can be made to improve the company’s financial performance. For example, if the company’s profitability ratios are lower than the industry average, the company can focus on increasing revenue or reducing costs to improve profitability.

Calculation of ratios
In interpretation and analysis of the ratios of a particulars firm, no conclusion can be reached unless the calculated ratio is compared with some predetermined standard. The comparison can be with the past ratios of the same firm or average industry standard or with the firm flourishing in that industry. The importance of a correct standard is obvious as the conclusion is going to be based on the standard itself.