Ratio Analysis
RATIO ANALYSIS
Ratio analysis is a key dimension of financial management, suggesting a relationship between profit and loss as mentioned in the balance sheet of an organization.
In Latin ‘ratio’ means reason. In English ‘ratio’ means relationship. Ratio analysis is defined as “the establishment of a reasoned relationship” of a fixed variable character between measurements of certain phenomenon having some kind of linkage. A ratio shows the arithmetical relationship between two figures.
ADVANTAGES 1. Ratio analysis helps decision makers to take appropriate decisions. 2. The Ratio analysis involves the study of the total financial picture of a concern/project. 3. The most fruitful area for use of financial ratio is predicting company/project failures. 4. Ratios enable the company’s management to analyze business situation and to monitor their performance. 5. It helps the management to diagnose the situations monitor the performance and chalk out future plans of the concern. 6. Certain ratios help the marketing manager, purchase manager and the financial manager to know what the positions are like and how to find a way out in typical situations.
CLASSIFICATION OF RATIOS
Financial ratio analysis helps to describe the significant relationship between two comparable figures in financial statement.
TYPES OF RATIOS
1.LIQUIDITY RATIOS • Current ratio • liability ratio • sales ratio • liability ratio
2 TURNOVER RATIOS • stock turnover ratio • receivable turnover ratio • turnover of capital investment
3 DEBT RATIOS • debt equity ratio • debt coverage ratio
4 PROFITABILITY RATIOS • gross profit ratio • net profit ratio • earnings per share ratio • fixed assets ratio
5 OPERATING RATIO • net sales to fixed assets • net sales to inventory • net sales to net profit • operating ratio • operating profit ratio
Ratio analysis is a key dimension of financial management, suggesting a relationship between profit and loss as mentioned in the balance sheet of an organization.
In Latin ‘ratio’ means reason. In English ‘ratio’ means relationship. Ratio analysis is defined as “the establishment of a reasoned relationship” of a fixed variable character between measurements of certain phenomenon having some kind of linkage. A ratio shows the arithmetical relationship between two figures.
ADVANTAGES 1. Ratio analysis helps decision makers to take appropriate decisions. 2. The Ratio analysis involves the study of the total financial picture of a concern/project. 3. The most fruitful area for use of financial ratio is predicting company/project failures. 4. Ratios enable the company’s management to analyze business situation and to monitor their performance. 5. It helps the management to diagnose the situations monitor the performance and chalk out future plans of the concern. 6. Certain ratios help the marketing manager, purchase manager and the financial manager to know what the positions are like and how to find a way out in typical situations.
CLASSIFICATION OF RATIOS
Financial ratio analysis helps to describe the significant relationship between two comparable figures in financial statement.
TYPES OF RATIOS
1.LIQUIDITY RATIOS • Current ratio • liability ratio • sales ratio • liability ratio
2 TURNOVER RATIOS • stock turnover ratio • receivable turnover ratio • turnover of capital investment
3 DEBT RATIOS • debt equity ratio • debt coverage ratio
4 PROFITABILITY RATIOS • gross profit ratio • net profit ratio • earnings per share ratio • fixed assets ratio
5 OPERATING RATIO • net sales to fixed assets • net sales to inventory • net sales to net profit • operating ratio • operating profit ratio