What is the management tool that compares different financial figures from the Balance Sheet and Profit and Loss account and classifies them into five categories?

• A. Market analysis
• B. Ratio analysis
• C. Budgeting
• D. Financial forecasting

Answer: (B)

Ratio analysis is about turning raw financial numbers into meaningful measures. By taking figures from the Balance Sheet and the Profit and Loss account, managers can compute ratios that reveal different aspects of performance and financial health. These ratios are grouped into five areas: liquidity (whether the firm can meet short-term obligations), profitability (how effectively it turns sales into profit), efficiency or asset management (how well it uses assets to generate output), gearing or leverage (the balance of debt and equity and the associated risk), and market or investment ratios (how the market values the company). Looking at these ratios over time and against benchmarks helps identify strengths, weaknesses, and trends to inform decision-making. Market analysis, budgeting, and financial forecasting don’t organize financial data in this way from the two statements, so they don’t fit the description as precisely.