 By ratio, we mean a tool that is used to express any logical relationship between certain variables like ratio of ages between two brothers, GDP of two different countries, fuel consumption of two different cars or sales volume of two different corporations. Financial ratios are used to express a logical relationship between certain variables taken from financial statements. These ratios are used to analyze financial and operating health of a business organization for any given period of time. These ratios are used in financial modeling or even these ratios are used by various users of accounting information like investment ratios used by investors or profitability ratios used by financial analysts, asset management ratios used by financial analysts or even firm managers. One more important benefit of these financial ratios is that these ratios standardize various values taken from financial statements of different organizations like a corporation has annual sales of 10 billion rupees and total assets of rupees 15 billion, another corporation has annual sales of rupees 2 billion and total assets of rupees 5 billion. Also in terms of absolute value, there is a huge difference but these ratios help in abolishing this absolute variance and standardize the values in terms of percentages in terms of ratios. There are certain pitfalls associated with financial ratios like there is no standard format to determine ratios of particular value, there is no standard theory behind the ratios that helps in explaining the number. There are certain regulated entities like utility companies. These entities are incomparable with the entities that operate in open market environment. Sometime companies vary in terms of sizes, in terms of operations and lines of businesses. So there is a problem in comparing these companies with reference to the ratios. Certainly there is a problem with accounting policies like a company uses return down value method for depreciating its long term asset but another company in similar line of business uses straight line depreciation for depreciating in assets. So there is a difference in accounting policies, also there is a difference in timing. A company ends on its financial year on 31st December of each year but a company in a similar line of business ends its operations on 30th June every year and closes its business and finalizes accounting records. So there is a problem with reference to timings, also there are certain extraordinary transactions that under fruitful ratio analysis. So there are such problems that may create a problem for the users of an accounting ratio. Dear student, before we go into financial ratios analysis for such purpose we have a certain financial statements like on the screen you can see a balance sheet of model limited. This screen is showing assets classified into non-current assets and current assets. Then we have liabilities site that is classified into shareholders' equity, non-current liabilities and current liabilities and we have then a model income statement that starts from sales touching every variable of the income statement and ends on closing retained earnings.