The ratio analysis is the important tool of the financial analysis of the any firm. Many people are interested to know about the financial informatics and growth of the firm. For this purpose, they use financial ratios.They can predict the ratio for the future too. Ratio analysis measure the liquidity, efficient , turnover and profitable of the firm.
Most estimates of the predictive power of financial ratios are based on the analyst's past experience with them.
A number of empirical studies have tested for the predictive power of ratios. In most of studies, ratios are used to predict the business failure. Other tested the power of ratios to predict corporate bond rating keeping the dependent variable. Then uses the regression analysis.
The most commonly uses ratios for predictive purpose are debt to equity, cash flow to total debt, profit margin, debt coverage, return on investment.
therefore the ratios analysis has the predictive power of the firm's performance evaluation.
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