RATIO analysis is a powerful tool of financial analysis. According to Kennedy and Macmillan, RATION is defied as the indicated quotient of two mathematical expressions” and as the relationship between two or more thing” in financial analysis a ration is used as an index or yardstick for evaluating the financial position and performance of a firm.
The compilation of trading, profit and of loss account and balance sheet represent the end product of a series transaction that have taken place over a particular period of time in order to make use of the information presented in all final account and the balance sheet, the user needs to analyze and interpret the meaning before making any conclusion. The accountant normally comments on final account and balance sheet either prepared by him or by other and interpret their significance doing so, he may find out that the accepted form of accounts and balance sheet are not easily followed by the Lyman: therefore, he re-design the form so hat the figure becomes more intelligible to those without expert knowledge in accounting. The first stage in the analysis is the development of a systematic review of the accounting data with the aid of accounting ratios, which shows the relationships of the result of the firm’s activities.The interpretation of the final account and the balance sheet could there after be carried out using the accounting ratio so obtained from the result of the activities. A ratio is meaningless unless interpreted against some standard. Two standard are used.