# 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 ratio Activity ratio Profitability ratio Current ratioLiquid ratioAbsolute ratioInterval measures  Stock turnover ratioDebtors turnoverPayable turnover Debt/ equity ratioDebt to total capital ratioInterest coverageCash flow/ debtCapital gearing Stock turnover ratioDebtors turnoverPayable turnoverFixed assets turnover ratioCapital employees turnover ratioTotal assets turnover ratioWorking capital turnover ratio In relation to saleGross profit ratioOperating profits ratioOperating ratioNet profit ratioExpense ratioIn relation to investmentReturn on equity capitalReturn on investmentReturn on capitalReturn on equity capitalReturn on total reserveEarnings per sharePrice – Earnings ratio