Cost Accounting

Ratio Analysis – Meaning and Examples

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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 a better understanding of the financial strengths or weaknesses of the firm. The ratio can be calculated from the information given in the financial statement.

Ratio Analysis - Meaning and Examples

Classification of Ratio

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

Functional classification or classification is the basis of test:

Liquidity Ratios

  • Current Ratio : Current ratio compares the current assets to current liabilities.
  • Liquid Ratio: Liquid ratio compares the liquid assets which is current assets reduced by stock and prepaid value, to current liabilities.
  • Absolute Liquid Ratio or Cash Ratio: Cash ratio compares cash and cash equivalents to current liabilities.

Interval measures

  • Stock turnover ratio
  • Debtors turnover
  • Payable turnover

Long term solvency and leverage ratio

  • Debt/ equity ratio
  • Debt to total capital ratio
  • Interest coverage Cash flow/ debt
  • Capital gearing

Activity Ratios

  • Stock turnover ratio
  • Debtors turnover
  • Payable turnover
  • Fixed assets turnover ratio
  • Capital employees turnover ratio
  • Total assets turnover ratio
  • Working capital turnover ratio

Profitability ratio – In relation to sales

  • Gross profit ratio
  • Operating profits ratio
  • Operating ratio
  • Net profit ratio
  • Expense ratio

Profitability 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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