Ratio Analysis

Introduction

Ratio analysis is one of the most useful techniques of analysis or interpretation of the financial statement. The term ratio may be defined as an arithmetical expression of the relationship of one number to another number.   In other words, we can say that ratio is an expression of the quantitative relationship between two numbers. There are a number of ratios for helping in the better understanding of financial strengths or weakness of the firm. The ratio can be calculated from the information given in the financial statement. The managerial ratio analysis such as helpful in decision making; helpful in financial forecasting and planning; Helpful in communicating; helpful in co-ordination; helpful in control; etc.

Classification of ratio

The following chart depicts the Functional classification or classification the basis of test from which these ratios are calculated:

Functional classification or classification the basis of test

Liquidity Ratio Long term solvency and leverage ratioActivity ratio Profitability ratio
Current ratio

Liquid ratio

Absolute ratio

Interval measures

 

 

Stock turnover ratio

Debtors turnover

Payable turnover

 

 

 

 

Debt/ equity ratio

Debt to total capital ratio

Interest coverage

Cash flow/ debt

Capital gearing

 

 

 

Stock turnover ratio

Debtors turnover

Payable turnover

Fixed assets turnover ratio

Capital employees turnover ratio

Total assets turnover ratio

Working capital turnover ratio

 

 

In relation to sale

Gross profit ratio

Operating profits ratio

Operating ratio

Net profit ratio

Expense ratio

In relation to investment

Return on equity capital

Return on investment

Return on capital

Return on equity capital

Return on total reserve

Earnings per share

Price – Earnings ratio

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