Ratio Analysis

Ratio analysis

A ratio is one number expressed in terms of another number to show the relationship between the numbers. For example, the relationship between 24 and 6 is 24/6 or 4:1 indicating that the former figure is four times as greater as the latter figure. A variation is to use a base of 100. This is called percentage. Using the figure at 24 and 6, the percentage becomes 24/6 × 100 = 400%. Financial statements (trading profit and loss A/C and balance sheet) are produced not just for their own sake, but for the use to which they can be put by the various parties interested in different aspects of these statements.

Categories of accounting ratios

Normally classified according to the aspects of business they are designed to highlight. These aspects fall under the following categories:

1. Financial soundness and stability, short & long terms. During the short term, the interest is liquidity and during the long term the interest is solvency.
2. Profitability and return on equity or assets.
3. Activity or efficiency measures.
4. Capital structure and gearing measures.
5. Market based ratios.