RATIO ANALYSIS

Q. What do you mean by Ratio analysis?

 

The information given in the basic financial statement serves no useful purpose unless it is interpreted and analysed in some comparable terms. The ratio analysis is one of the tools in hands of those who want to know something more from the financial statements. Ratio analysis is the process of determining and presenting in arithmetical terms the relationship between figures and group of figures drawn from these statements. Ratio is the basis of this analysis. A ratio may be defined as the relationship between two or more things. An accounting figure conveys some meaning if it is related to some other relevant information. Thus, the relationship between two accounting figure, expressed mathematically is known as a financial ration )or simply as a ratio). The ratio can be calculated by dividing one figure by the other.

The ratio may be expressed in any of the three ways-.

1. RATE, which is the ratio between the two numerical facts over a period of time e.g. stock turnover in three times a year.

2. Pure Ratios or Proportions, which are arrived at by the simple division of one number by another e.g., current asset to current liability ratio is 2:1

3. Percentage which is a special type of rate expressing the relationship in hundred. It is arrived at by multiplying the quotient by 100 e.g., gross profit is 25% of sales.