RATIO ANALYSIS

A ratio analysis is an expression of

mathematic relationship between inter-
dependent figures. When these
interdependent figures belong to a financial
statement in accounting, then the ratio of
such figures is known as an accounting
ratio.
 RATIO ANALYSIS
• An analysis of financial statements with the
help of ‘ratio’ may be termed as “ratio-
analysis”. It implies the process of computing,
determining and presenting the relationship of
items or group of items of financial
statements.
• It also involves the comparison and
interpretation of these ratios and the use of
them for future projections.
 RATIO ANALYSIS

Def:- “The use of accounting ratios to

analyze financial statement is known as
Ratio Analysis.”
It is the process of computing, interpreting
and comparing accounting ratios for future
projection.
 RATIO ANALYSIS
Objectives of Ratio Analysis
1. The Primary object is to help
management in analyzing and interpreting
the financial statement, to get adequate
information useful for the performance of
various functions like planning, co-
ordination, control, communication and
forecasting
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Need of Ratio Analysis

a. Provides insight into the performance of
business.
b. Better interpretation of financial
statement
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• This quantitative relationship (that is ratio) may be
expressed in either of the following ways.
1. In proportion :- eg. The relationship between
current assets and current liabilities as 2:1
2. In Times :- eg. Sales is divided by stock thus 6
times is the ratio between sales and stock.
3. In percentage:-eg. The relationship between
gross profit and sales may be expressed as 25%.
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Importance of Ratio Analysis
a.Setting up the standard
b.Present trend
c.Suggest changes
d.Inter-firm comparison
e.Financial planning and forecasting
f.Complimentary to financial statements
g.Correct management decisions
h.Helps in management control
i.Communication
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Limitations of Ratio Analysis:-
1.Fully depending on financial statement
2.Lack of adequate norms or scales
3.No use of single ratios.
4.Changes in Accounting
5.Limitations of financial accounting
6.Window dressed-up
7.Personal Bias
8.Not comparable
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Classification of Ratios

1.Profitability ratios
2.Turnover Ratio
3.Financial Ratio
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Classification of Ratios
1.Profitability Ratio
a.Gross profit Ratio
b.Net Profit Ratio
c.Operating Net Profit Ratio
d.Operating Ratio
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Classification of Ratios
2.Turn Over Ratio
a.Inventory (Stock)
b.Debtors
c.Creditors
d.Fixed Assets
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Classification of Ratios
3.Financial Ratio
a.Current Ratio
b.Liquidity Ratio
c.Debt Equity Ratio
d.Earning per Share Ratio.