Describe ratio analysis including its purpose,application,and interpretation.

A ratio is a mathematical relation between two quantities and can be expressed as either percent,rate,or proportion.Ratios are used to analyze the relations between financial statement items that have an economically important relation,such as Sales and Accounts Receivable or Cost of Sales and Inventory.Ratios can be used for comparison to industry standards,a company's competitor,budgets,or past performance.Ratios are used in all four of the building blocks of financial analysis (liquidity and efficiency,solvency,profitability,and market prospects).Ratios are valuable because they can indicate areas of a company's financial situation,which may require further investigation.