Ratio Analysis

Concept, Meaning and Types of Ratio Analysis

Notes

Concept and Meaning of Ratio Analysis

Ratio analysis is the mathematical form of expressing the numerical or arithmetical relationship between two figures. Ratio analysis assesses the strength and weakness as well as evaluates the historical performances and current financial conditions of a firm. Ratios throw light on the firm’s current status on the use of debt funds or whether the firm is exposed to any serious financial strain. Ratio analysis is based on the historical accounting information which sometimes makes it difficult to predict the future condition of the business or consider the changes in the price level.

Types of Activity Ratios

Also known as efficiency ratios or velocity ratios, activity ratios are the assets management ratios which is represented by the sales or cost of goods sold or with the investment in various assets. Activity ratios measure the efficiency of enterprise’s that it puts on to employ the resources or assets at its command. Debtors turnover ratio compares the sales of the uncollected amount from customers with whom goods were sold. Capital employed turnover ratio depicts the inter-relationship between the permanent capital (capital employed) and net sales.

Types of Profitability Ratios

Net profit ratio is the link between Sales and Net profit. Return on assets is an excellent measure to check on a company’s overall performance. Net profit after tax (NPAT) is the excess of gross profit and other incomes over the operating & non-operating expenses and losses.