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This type of ratio analysis suggests the returns that are generated from the business with the capital invested.
Types of ratios in ratio analysis. The higher the ratio the beneficial it is to the company. Ratio analysis consists of calculating financial performance using five basic types of ratios. Financial ratio analysis is the process of calculating financial ratios which are mathematical indicators calculated by comparing key financial information appearing in financial statements of a business and analyzing those to find out reasons behind the businesss current financial position and its recent financial performance and develop expectation about its future outlook.
Profitability liquidity activity debt and market. Analysis of financial ratios serves two main purposes. In addition to above Debtors Turnover Ratio and Creditors Turnover Ratio should also be given due importance.
Profitability ratios can be further divided into four categories- GROSS PROFIT RATIO It represents the operating profit of the company after adjusting the cost of the goods that are been sold. Leverage ratios are also referred to as debt ratios debt-to-equity ratios and interest-coverage ratios The debt ratio compares a businesss debt to its assets as a whole. Though Ratio analysis is a powerful tool for analyzing the financing position of a.
Market value ratios. Current Ratio Current Assets Current Liabilities. Current Ratio Liquid Ratio Absolute Liquid Ratio etc.
D Activity Ratios such as Inventory Turn Over Ratio Debtor Turnover Ratio Working Capital Turnover Ratio measure the efficiency with which the resources of a firm have been employed. Liquidity Ratios Solvency Ratios Activity Ratios Profitability Ratios Cash Flow Indicator Ratios and Market Value Ratios. Normally a ratio greater than 1 implies a sound position of a firm to pay off the liability or obligation under concern.
One of the most important facets of ratio analysis lies in the selection of an appropriate comparable The two companies whose ratios are compared should be of similar size business model. In this type of analysis we compare the ratios over a period of time and observe the variations. Take for example Current ratio that compares current assets to current liabilities both derived from the balance sheet.
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