# 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 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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